As you’re probably aware, there are 122 teams in the four major sports leagues in the United States. The NFL has 32 teams, the other three have 30. At the beginning of this year, there were 68 stadiums or arenas housing those teams for which publicly traded companies bought the naming rights. Since 1996, Ira Malis, who retired in 2013 after a distinguished career in Finance (see Appendix 1), has been tracking the performance of the stocks of those companies. He found that, somewhat counterintuitively, they cumulatively out-gained the S&P 500 by a significant margin. These are his findings:
As a pop quiz, can you name which teams play in these buildings?
- Globe Life Stadium
- Jobing.com Arena
- Moda Arena
- NRG Stadium
- Sleep Train Arena
- Smoothie King Arena
- TCF Bank Stadium
The answers are the MLB Rangers, NHL Coyotes, NBA Trail Blazers, NFL Texans, NBA Kings, NBA Pelicans, and (temporarily) the NFL Vikings. How many did you get right?
Naming rights have become valuable assets for builders of stadiums and/or owners of teams to sell, as they’re typically not part of “shared” revenues, which are now distributed in one form or another amongst the partners in each of the four major leagues.
For a long time, there was a stigma that a public company putting its name on a stadium would ensure bad performance for its publicly traded shares. While academics have published studies that prove this for the first few months (examples here and here), I have focused on the longer term performance of these shares, and the results would be the envy of most money managers.
For the 2014 year, there are 68 buildings related to public companies – this will rise to 69 in 2015 as Torchmark put the Globe Life name on the Ballpark in Arlington (Texas Rangers) after the 12/31 cutoff for my index. In addition, other stadiums have either not sold their naming rights, or have sold to a private company (Amway Center) or to a company without a liquid US stock (Air Canada Centre). Others share a facility, but when two or three teams (Staples Center) share a facility, it is only counted once. To be counted more than once, you have to have your name on more than one facility (AT&T).
The table below shows that since the beginning of 1996, when the naming rights started to take off and there were 15 naming rights companies (NRCs), through the August 19, 2014 (when there are currently 68 NRCs) that index is up 580%, versus the 222% increase in the S&P 500. The NRC index beat the market in 13 of the 19 calendar years (including 2013) that I have been tracking the stadia. This year, the index is trailing the S&P 500, as the majority of the 17 banks in the index (the largest individual sector) have underperformed.
The methodology is as follows: At the beginning of each year, I create an equal weighted index (i.e. each stadium counts for the same percentage of the January 1 starting value unless the company has its name on more than one stadium; the S&P 500 is weighted based on market capitalization so a larger companies would be more than equal weighted) based on the following criteria:
- You have to have your name on a stadium on January 1st, such as Pepsi Center, or you can own a subsidiary, such as Tropicana. In both cases, Pepsi is in the index.
- If two teams share the same arena, such as the Verizon Center, it counts only once, but if there are two separate venues (like Pepsi above) it is double weighted.
- There must be a liquid, U.S. publicly-traded security. There are foreign companies that have liquid American Depository Receipts (ADRs) – Honda, Toyota, and many Canadian banks, for example – which are fine. If there is no liquid U.S. publicly-traded security, such as Air Canada or Bridgestone, the company is not in the index.
- If a company is in bankruptcy, it is not put in the index in the year after it files. The first January 1st after it emerges from bankruptcy, it is again in the index. So the year American Airline entered bankruptcy — 2011 — it was in the index. It was out of it in 2012 and 2013. Because it emerged from bankruptcy last December, it’s included this year (twice, because its name is on two arenas).
- If a company is acquired for cash, the cash price is frozen on the date the deal closes. In 2013, two of the 65 companies in the index – Energy Solutions and Heinz – were taken over for cash. If the company is acquired for stock, the buyer’s stock is in the index for the remainder of the year.
The table below shows the 12 companies that were in the index when they filed for bankruptcy. These 12 examples are what make investors particularly leery of the NRCs — this is an excellent example of the behavioral finance theory known as vividness bias. As Warren Buffett has said, “People tend to underestimate low probability events when they haven’t happened, and overestimate them when they have.”
We remember the 12 bankruptcies in a magnitude that is far greater than their negative impact on the index. In 2001, there were 48 companies in the index, and four went bankrupt, yet the index beat the market because McAfee advanced 517% that year.
In a word, Qualcomm. In 1999, Qualcomm shares advanced from $3 per share to $88 per share, an increase of over 2600%. Even if we were to start our index in January of 2000, however, we would have shown a compound growth of 4.3% a year, vs 2.1% for the S&P 500. While this is not as good as the 430 basis point advantage dating back to 1996, it is still better than the vast majority of money managers.
There are a total of 122 teams in the four major sports – 30 each in baseball, basketball, and hockey, and 32 in football. If each team had their own building, and the naming rights of each building were sold to a public company, than there would be 122 companies in the index.
There were 68 venues that were in the Naming Rights Index. There were seven companies that had their name on more than one venue.
Of the remaining 54 potential venues, four were public companies (three Canadian and one Japanese) that did not offer a U.S.-traded liquid security. There were 21 venues, such as Madison Square Garden, that have not chosen to sell their naming rights yet. Examples of the 17 that were sold to a private or mutual company would include Petco Park, Sports Authority Field, or Safeco Field. Finally, 12 teams played in venues that were shared by two or more tenants – these are mostly hockey and basketball teams, as in TD Garden in Boston.
There is, of course, no rational reason to believe that having your name on a stadium would make your stock outperform the market. It is rational to believe, however, that the sort of company that would have the means to afford the naming rights, and the product offering that would benefit from increased name recognition, could be a company that would be well-positioned in the stock market.
In the past, naming rights have been bought by three types of companies: 1) local companies that were based in a particular location, 2) national brands that wanted the cache of being associated with an important venue, or 3) up and coming “dot-coms” using “funny money” to pay for the naming rights. This third type is basically over as insane internet valuations are, by and large, a thing of the past, and stadium authorities are leery of the sustainability of those instant companies.
The current roster of naming rights companies share characteristics with the most successful investments of the past ten years. They are 1) large companies, 2) consumer facing, and 3) international in sales. The average market capitalization of the companies in the index is $69 billion, versus $36 billion for the S&P.
Of the 68 companies in the current index, the constituents are dominated by banks (17), media/telecom (10), insurance (9), beverage (6), energy (5), and the rest split evenly amongst airlines, autos, consumer products, consumer services, retailers, and technology.
Appendix 1: Ira Malis’ experience:
- Sell side insurance analyst for Alex. Brown & Sons. – 1985-1996
- Associate Director of Research for BT (Bankers Trust) Alex. Brown 1996-1998
- Portfolio Manager for Prospector Partners 1998-1999
- Sell-Side Director of Research for Legg Mason Wood Walker 2000-2004
- Buy-Side Director of Research for Legg Mason Capital Management 2004-2007
- Managing Director for Stifel Nicolaus Capital Markets 2007-2010
- Co-Head of Institutional Sales for Stifel Nicolaus 2010-2013
In addition, since 2007, Ira has served on the Board of Directors, and the Audit Committee, of OneBeacon Insurance Group Ltd., a New York Stock Exchange Listed Company (NYSE:OB).
If you would like to learn more about Ira’s calculations, please email RyanGlasspiegel [at] GMail and he will connect you.
[Graphics by Evan Russell/USA Today Sports]