Online Gambling Stocks

Brian Hicks

Updated February 10, 2009

The Unlawful Internet Gambling Enforcement Act (UIGEA) was first put in place in late 2006. However, if it’s reversed, as Barney Frank is tying to do, the United States could reap a $17.6 billion profit over the next 10 years, according to a PricewaterhouseCoopers study.

As the 111th Congress begins work under a new administration, Frank has already expressed interest in reintroducing legislation that would counter the UIGEA, reportedly telling the Financial Times that he wants to "reintroduce a bill in the next few weeks to establish a licensing and regulatory framework for online gambling operators." It’ll be similar to the Internet Gambling Regulation and Enforcement Act of 2007 (IGREA), which was introduced by Frank, attracted some support, but never made it to the House for a vote.

And, according to Poker News, Franks expressed belief to the Financial Times that the "chances for the new legislation to become law to be much better than had been the case for the IGREA, both because of the change in administration as well as ‘because public opinion [is] demanding the right to gamble online.’"

On this news, there are two stocks you must own now… but we can’t divulge which ones they are in this forum without unfairly rocketing them with tens of thousands of readers. Instead, we’ve posted their names in the latest SC Trading Pit article, available here.

But understand this: We’re simply trading news with these two trades. As we get closer to bill reintroduction, we expect these stocks to move even higher. And if a bill were to be approved, we’d look to ride out the news dissemination momentum.

Why Trading on the News Works

You see, what allows us to trade on news is information friction, or the delay in the dissemination of news to a greater number of investors through electronic media. Sometimes the news or rumor we pick up on won’t be fully disseminated, meaning that the intended audience won’t get it until later in the day when they get home from work. By then, we’ve already bought the stock and are just waiting for the trigger (the nightly news report, for example) that’ll throw gasoline on our small flame.

But the question remains, can the average investor really profit from news without having proprietary research?


As a study from the Harvard Institute of Economic Research observes, "New technology is rapidly democratizing securities markets. The costs of gathering information and executing trades are being driven to negligible levels. These changes allow a rapidly growing base of investors to participate in the financial system."

And there are dozens of high-level studies to support my news-driven investment approach.

"I examine returns to a subset of stocks after public news about them is released. I compare them to other stocks with similar monthly returns, but no identifiable public news. There is a major difference between return patterns for the two sets. I find evidence of post-news drift, which supports the idea that investors under-react to information [ . . . ] There is a large amount of evidence that stock prices are predictable."

—Wesley S. Chan, M.I.T., Stock Price Reaction to New and No-News: Drift and Reversal after Headlines

"Arguably, the most important process affecting price movements is the news arrival process. For example, in Ross (1989) the volatility of stock price changes is directly related to the rate of flow of information to the market [ . . . ] On days no news arrives, trading is slow and price movements are small. When new information arrives that results in a change in expectations, trading becomes vigorous and the price moves in response to the impact of the news [ . . . ] In addition to price movements, news arrivals can affect the time between trades, number of transactions, and volume of trade."

—John H. Maheu, University of Alberta, and Thomas H. McCurdy, University of Toronto, News Arrival, Jump Dynamics and Volatility Components for Individual Stock Returns

"Periods of good news are followed by periods of unusually high returns relative to natural benchmarks, with the reverse for bad news [ . . . ] Post-event drift is the tendency of individual stocks’ performances following major corporate news events to persist for long periods in the same direction as the return over a short window—usually one to three days—encompassing the news announcement itself."

—Andrew Jackson and Timothy Johnson, Unifying Under-reaction Anomalies

So the next time someone says you can’t trade on news, ignore them.

Trading on the News: A Mental Note

Please note, trading on news alone can be a dangerous, highly volatile blood sport. It’s the reason it’s not the sole trading apparatus in SC Trading Pit.

When we’re not trading news, we trade volume spikes, undervalued gems, earnings growth, the undiscovered, the forgotten, the ignored, the ones with little or no analyst coverage, momentum, blood in the streets, technical set-ups and candlestick patterns.

We’re not your average run-of-the-mill small cap letter. While we’ll take the small 10% gainers, we’re really looking for the next Yahoo, eBay, and Wal-Mart.

For profit possibilities like these, visit SC Trading Pit.

Good Investing,

Ian L. Cooper

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