DraftKings (NASDAQ:DKNG) is limping into year-end. The online sportsbook operator shed nearly a quarter of its value over the past month. But there might be hope for the downtrodden stock early in the new year.
Short covering could boost DraftKings in early January, and while long-term investors would like to see fundamentals improve in earnest, the stock is down 41.32 percent year-to-date, indicating gains — regardless of catalyst — will be welcomed. Historical precedent exists to support the notion that heavily shorted stocks that sagged in the previous year often perform well to start the following year.
The highly shorted stocks that were down big for the year performed the best in the first week of the New Year. They gained an average of 5.43 percent in the week,” says Rocky White, senior quantitative strategist at Schaeffer’s Investment Research.
It remains to be seen if DraftKings lives up to that precedent. But there is some support for the beaten-up stock, with Goldman Sachs recently noting the gaming equity offers significant upside potential over the next year.
Shorts Having Field Day with DraftKings
Gaming stocks are often favored targets of short sellers. But that scenario is being amplified with DraftKings this year.
In June, Hindendburg Research issued a scathing report in which the short seller claims DraftKings’ SBTech unit operates in black and gray markets, has ties to organized crime, and launders money, among other accusations.
Earlier this month, Kynikos Associates founder Jim Chanos revealed that his firm is short the daily fantasy sports (DFS) giant, calling the business “flawed,” while noting DraftKings’ is likely to continue bleeding cash even if revenue rapidly expands.
On those notes, it’s not surprising that DraftKings is heavily down. It’s one of 25 stocks on a Schaeffer’s list of stocks that are down at least 10 percent this year, with a minimum short interest of 10 percent. DraftKings’ short interest is 10 percent, according to the research firm.
“These stocks meet the criteria above for highly shorted, beaten-down stocks that could benefit from early year short covering. Based on the analysis above, these stocks have an increased chance at outsized gains in the first week of the New Year,” adds White.
Some Support for DraftKings
DraftKings is the only pure play gaming name on the Schaeffer’s list. But streaming sports provider fuboTV (NYSE:FUBO), which is getting into sports wagering, is also part of the group. Short interest is 15 percent in that name, indicating bearish traders could be playing with fire if takeover rumors prove accurate.
As for DraftKings, it has the support of some prominent investors, including Cathie Wood’s ARK Investment Management.
Since Dec. 20, ARK bought more than 250,000 shares of DraftKings, adding to its already sizable stake in the wagering company.
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