Speedway Motorsports (TRK: $16/share) – Closing Short Position – down 32% vs. S&P up 29%

Speedway Motorsports was originally selected as a Danger Zone Idea on 7/13/15. At the time of the initial report, the stock received a Very Unattractive rating. Our short thesis highlighted high fixed costs, the dwindling popularity of NASCAR, and a high valuation driven by misleading earnings.

During the 1,206-day holding period, TRK outperformed as a short position, declining 32% compared to a 29% gain for the S&P 500.

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TRK was upgraded to Neutral on 10/17/18 after the falling stock price made its valuation less dangerous.

The company’s net operating profit after tax (NOPAT) continues to decline, down from $57 million in 2014 to $42 million over the trailing twelve months. However, the company has maintained a high free cash flow yield (currently ~8%) by cutting back on capex. TRK used this free cash flow to reduce its total debt from ~$400 million in 2014 to ~$200 million (32% of market cap) currently.

Even though we still think the long-term outlook for TRK’s business is bleak, the improved balance sheet and lowered valuation reduce the downside risk. As a result, we are closing this position.

Figure 1: TRK vs. S&P 500 – Price Return – Successful Short Call

Sources: New Constructs, LLC and company filings

Note: Gain/Decline performance analysis excludes transaction costs and dividends.

This article originally published on November 7, 2018.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

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