Adding to $JPM & REPLACING $GAN with $BETZ as a top 5 pick for 2021

Why we plan to add to our $JPM position (Top 5 Pick for 2021 and up 9% year-to-date through 1/19/21)

$JPM beat across most Q4 metrics and the backdrop for the industry on bad loans was positive. The main issue for the stock was mixed results from its peers, high expectations, and trends around earnings.
 
Positive Industry Backdrop on Bad Loans:
All four of the big banks ($JPM $C $WFC $PNC) that reported on Friday (1/15/21) morning posted loan loss benefits during Q1 which is a positive. This follows higher than expected loan loss provisions during the prior three quarters for most banks due to Covid-19. Simply, banks thought there would be more troubled loans in the first 3 quarters of last year than they do now.
 
Mixed Company Specific Results:
All four of the big banks ($JPM $C $WFC $PNC) that reported on Friday morning beat consensus EPS expectations. However, experienced investors know the composition of the EPS beat is what is important. Net Interest Margin (NIM) and Net Interest Income (NII) are two of the most important metrics. $PNC & $C both missed expectations for Q4 NIM and $C rev guidance was also below expectations. $WFC’s 2021 forecasts for NIM was below expectations and forecasts for expenses was above expectations.
 
High Expectations:
Expectations were high going into their earnings releases on Friday morning. As of the close of 1/14/21 (Thursday), YTD: JPM +9.1%, S&P financial sector +4.7%, S&P500 +0.3%.
 
Trends around Earnings:
JP Morgan historically has a tendency to decline the day of earnings with all the gains between earnings. JPM’s stock has actually declined 52% of the time over the past 10 years the day of earnings while the stock has almost tripled since the end of 2011. The tendency of others like $WFC is much worse on the day of earnings.
 
How we managed the Risk Around Earnings:
Our goal is to manage risk to produce the best rewards relative to the risk we are taking on. With the stocks going straight up into earnings when they historically have a tendency to sell-off the day they report, we decided to hedge the positions by shorting the $XLF (Financial Sector ETF) and $KRE (Regional Bank ETF) near the close on Thursday.
We plan to remove these hedges at some point post earnings and plan to buy more $JPM given their superior results relative to their peers. We note that all four big banks went down on Friday including $JPM. We like strong management teams and believe Jamie Dimon, the CEO of JP Morgan, is one of the best in any industry. This is why JPM is our favorite pick in the financial sector though we own others as well.

---

Why we sold our $GAN position (Top 5 pick for 2021 and up 16% year-to-date through 1/19/21) and recommend investors swap into $BETZ instead

$GAN has gone up significantly since we first mentioned it in late December. However, recently the exercise and sale of ~$2M in long dated options by the CCO following sales by other executives in December has us concerned. 
 
Investing with Management:
One of my rules for investing is to invest with management. I love to see senior management buying stock when it is getting hit. As an example, Jamie Dimon bought $25M of stock in February of 2016 with the stock down nearly 20% to start the year due to concerns about a global recession. In fact, some consider his stock purchase as marking a bottom for the entire market at the time. The stock finished 2016 up 30%.
 
Conversely, the exercise & sale of options with years to expiration concerns me. This happened last week as $GAN’s Chief Commercial Officer exercised and sold about ~$2M worth of options that were not due to expire till 2028 and 2029. This option transaction also occurred after the close of Q4 with the stock being up 16% YTD to $23.61 after more than doubling last year. This follows an offering the company did at $15.50 per share in late December to help fund their acquisition of CoolBets. Included in the offering, there were 383,500 shares that were also sold by selling shareholders including some from top executives.
 
We thought GAN was potentially less risky way to play online sports betting given the stock decline near year’s end:
When we put out our top picks for 2021 on December 29th, $GAN’s stock had declined 33% from a closing peak of $27.58 on 7/2/20 to $18.54 on 12/28 given some concerns over their biggest customer FanDuel (~40% of revs). At GAN’s closing price today (1/19/21) of $23.61, the stock is up 27% from the close of 12/28.
 
But we believe there is even a less risky way for those who want to invest in online sports betting through the $BETZ ETF:
In newer internet related markets, valuations are often high and the online sports betting space is no exception. This market essentially came into existence only a short time ago when the Supreme Court legalized online sports betting in May of 2018. As a result, much like with other online markets there are dozens of names that are all competing to become category killers in online sports. Many of them will not live up to the current hype but some will with returns that will more than make up for the rest. As a result, we believe for an individual investor who is more interested in the bigger picture trend of sports betting moving to the internet, that a diversified ETF like $BETZ (a Sports Betting & iGaming ETF) is their best choice. We believe one or more of those names held in the $BETZ ETF will become a category killer: This ETF is up 11% year-to-date through 1/19/21 versus $GAN which is up 16% YTD.
 
$BETZ replaces $GAN as one of our Top 5 picks through year-end:
Regardless of the promise 10 years from now, the individual stocks will go through ups and downs and the $BETZ ETF should help diversify that risk. We remind investors that even Amazon’s stock went from $106 to $6 when the internet bubble burst in 2000 despite revenues almost doubling over two years. But this was better than the thousands of companies that went to zero during that time. Obviously, we have our favorite stocks and we still own six names related to online sports betting in the portfolio creating our own ETF versus owing $BETZ. But the sizing and individual positions are always changing as we get more data and the market matures. However, is easier for an individual investor to participate by owning $BETZ. The largest position in that ETF is 5%, but the ETF contains most of the names that we have owned over time or currently own in the space. We would be shocked if one of them was not the Amazon for online sports betting in the future.
 
Similarly, an investor could just as easily own the $XLF or $KRE instead of owning $JPM or other individual bank stocks. Unlike the online sports betting space, the banking sector is obviously mature and $JPM has proven that they are one of the winners.

---

Hedging with ETFs:

For those that like owning individual names instead, an ETF can be used to hedge instead of selling the underlying position. This is something we like to do in the fund. At some point in the future, we may short $BETZ to hedge our specific online sports betting positions over the short-term rather than selling the individual names. For example, we shorted the $XLF and $KRE instead of selling our individual bank stocks like $JPM going into earnings season.