MegaMillions at $640M Is Still A Losing Bet
“May the odds be ever in your favor!” – This sinister line from the blockbuster movie The Hunger Games could easily be the ironic tag line of every lottery system in America. A lot of ink has been spilled about how bad of an investment a lottery ticket is. I would argue that it is a regressive tax on the numerically challenged and the statistically disabled. Megamillions helpfully points how unlikely you are of winning.
However, I have an old friend that always bought the big PowerBall or MegaMillions tickets whenever the payout got above the odds of winning. MegaMillions is in the news this week with a current estimated Jackpot of $540 million. Given the odds of winning the jackpot are *only* 1 in 175 million – he must be buying tickets by the fistful. Plus, even if he doesn’t win the jackpot he can still win $250k, $10k, or even $2! I must admit a jackpot of half a billion is exciting any way you slice it. I decided to go digging to see if I should buy some tickets. So… are the odds really in your favor?
Nope. According to an awesome post written by Jeremy Elson of Microsoft Research, you must factor in taxes, the present value of the award AND the likelihood of other potential winners. His key insight is that when jackpot sizes rise beyond a couple hundred million, the pace of ticket buying goes super-linear – meaning it accelerates. To quote Jeremy:
“This means there is a point of diminishing return where the negative expectation due to ties outweighs the positive expectation due to having a larger jackpot. Taking this into account, it is unlikely that buying a lottery ticket is ever profitable in expectation, no matter how big the jackpot gets.”
In fact, Jeremy posits that the peak expected value of $0.693 per $1 ticket, including the value of non-jackpot prizes, happens when the jackpot reaches $420 million. The expected value then begins to decline again because you will most likely split the winnings with one or more winners.
Ok, so if it never makes sense to buy a MegaMillions ticket – who wins? At the end of Durango Bill’s insightful MegaMillions analysis, he lists the winners:
“1) Federal Government (Lottery winnings are taxable)
2) State Governments (Again lottery winnings are taxable)
3) State Governments (Direct share of lottery ticket sales)
4) Merchants that sell tickets (Paid by the lottery organizers)
5) Lottery companies (Hint: They are not doing all this for free)
6) Advertisers and promoters (Paid by the lottery companies)”
There is a footnote provided by Jeremy however… if you happen to have gambling winnings, the purchase of the lottery tickets are tax deductible against those winnings! So, don’t be surprised if you see Doyle Brunson or Phil Hellmuth at your local convenience store stocking up on lottery tickets.
When you buy a coffee today, don’t buy the lottery ticket – it ain’t worth it. Hmmm, it is less than your coffee – buy one ticket. You gotta be in it to win it, right?
Disclosure: I bought some tickets… Heck, why not?
Netflix Hatches a Hobbled Dinosaur
On Monday, I submitted an article to Seeking Alpha about Netflix’s jarring changes. You can read the whole article at Seeking Alpha but here is the summary:
I agree that Reed’s apology was the right thing to do and was well written, but the pricing change was a tactical misstep and a missed opportunity. The splitting of the business was perhaps the right long term move but feels more about the company than the customer. For such a successful customer focused company, these moves feel pretty jarring. Customers are clearly voting with their feet.
These rapid changes to the customer experience are detrimental to Netflix’s usability and brand. Perhaps these changes will pay off with better margins, more clarity, strategic focus and CEO accountability over the long term. These changes may have been inevitable, but I would have advocated a slower rollout, better communication, more user testing and ongoing site integration.
Full article here: Netflix Creates a Hobbled Dinosaur.
7 Luxury Stocks to Sell or Short
Last week I posted a negative outlook on luxury good stocks on Seeking Alpha. Of course, timing is everything and these stocks promptly rose further! But if you didn’t see the article then, you have an opportunity now to sell at even higher prices!
During the 2008-09 financial crisis, luxury goods companies’ sales, profits and stock prices tanked. During the rebound they have grown dramatically, and many stocks are now above their pre-crisis highs. This situation will not last.
Here are seven vulnerable stocks: Estee Lauder (EL), Polo Ralph Lauren (RL), Tempur-Pedic (TPX), Coach (COH), Tiffany & Co (TIF), Nordstrom (JWN) and Lululemon (LULU).
The thesis hinges upon a continuing economic slowdown in the U.S. and Europe. A variety of factors will rein in spending among the wealthy while increasing costs at luxury goods companies:
1) Stock Market Volatility and Decline
2) The recent renewal in home price declines
3) Continued Economic and Political Uncertainty
4) Inevitable Increased Taxes
5) Higher Input Prices
With sales likely to slip, costs likely to rise and high PE and PS ratios, these luxury stocks are likely to fall over 30% from current prices.
You can read the full article on Seeking Alpha: Luxury Goods Vulnerable.
4 Strategically Smart Technology Mergers
I posted a hypothetical piece to Seeking Alpha about tech mergers a month ago – 4 Potential Tech Mergers.
Here is the quick summary:
Oracle (ORCL) should buy Dell (DELL)
Apple (AAPL) should buy Adobe (ADBE)
Amazon (AMZN) should buy Sirius (SIRI)
Microsoft (MSFT) should buy Intuit (INTU)
Read more at Seeking Alpha: 4 Smart Tech Mergers
BOFI: The Future Costco of Banking?
I posted an article at Seeking Alpha about my take on Bank of the Internet (BOFI) – a very undervalued bank.
Below is a quick summary and a couple of charts omitted by Seeking Alpha’s editors.
I had meant to post this prior to their earnings. While you may have missed out on the pop post-earnings, the stock is still a good buy in the 14s and 15s. It may come down rapidly if the market continues to decline – that would be another buying opportunity.
The reasons to buy BOFI:
1) A Growing Bank – a rare thing in this environment
2) Low Cost / High Yield Leader
3) Prudent Risk Management
4) Competitive Environment Favors Internet Banks
5) Inexpensive Valuation
6) Recent Product Innovations
One reason not to buy: This is a small cap, illiquid, and risky stock. If the market drops a lot more, BOFI will likely tank even further.
Here are two charts that were intended for the first section about growth:
Read more at Seeking Alpha: BOFI: The Future Costco of Banking?
6 Challenges for EXPE and PCLN
I think the time is right to buy Expedia (EXPE) and short Priceline (PCLN). Admittedly, Priceline has been growing faster and has done a better job internationally. Expedia, while still larger than Priceline, did not move aggressively enough internationally. Expedia has made some odd moves but it has powerful brands and assets including TripAdvisor.
Both firms are challenged by:
- Disintermediation. The hotel chains and airlines don't like their profits going to the intermediators and are working to reduce their reliance on the biggest ones by increasing bookings on their own sites and getting better terms from competitors.
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Not a natural monopoly. Hotels will continue to expand their distribution. Other competitors are trying hard to best the leaders – including Ctrip, Orbitz, Travelocity and Yahoo Travel.
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New entrants. Aggregators or meta-search sites like Kayak and Bing Travel and emerging competitors Google (GOOG) and HipMunk are gaining market share and mindshare.
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Energy shock. Rising oil prices crimps travel more than almost any other industry. If Peak Oil is imminent, the travel industry will get crushed.
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Unrest and Protest. Unrest can be quite unsettling for travelers. Revolutions in the Middle East. Drug killings in Mexico. Riots in Greece and soon the other PIIGS. Saber rattling on the Korean Peninsula.
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Frugality and Austerity. Saving money is a theme during these deleveraging times – travel is often the first thing to go.
You can read the full article with more metrics at Seeking Alpha:
Disclosure: I am long EXPE and short PCLN.
7 Reasons Why Netflix Will Soundly Beat Amazon in Online Video
I posted another article to Seeking Alpha (where I am currently publishing all stock related posts).
Here is a quick summary:
Amazon has entered the subscription video business. While Amazon may want to win in this space, it may not have the financial will or the strategic necessity. Netflix will fight hard for leadership in this space, since it is an existential issue for it.
Netflix has the momentum and their growth will be dented but not halted. A critical mass of paying users allows for the best and most exclusive content, which reinforces the critical mass of paying users.
The ultimate winners may well be the content producers who have been looking for a credible threat to reduce Netflix's growing clout. While Amazon and Netflix will both continue their amazing growth, both will likely have lower margins because of Amazon's entry. How will that impact on their super-charged, high octane, high-flying stocks? That is another story for another blog post.
See the full post, including my 7 reasons here:
