After a rough patch following the September 11th tragedy, the stock market has found a footing and the economy has improved. In the last three months, the S&P 500, the benchmark for the stock market, gained almost 11% and the Nasdaq is up 28%.
But just as many stocks rose as fell in the last quarter, and some familiar names have taken a bit of a hit. In particular, Speedway, the Indianapolis-based company that owns several car races and museums, has declined by almost 11% since the beginning of 2019.
The company’s stock is down because people are questioning whether or not it’s worth it for an owner to gamble on the stock market given the current state of the economy. The problem is, Speedway‘s stock price reacted negatively to significant news even before the pandemic, and some investors believe its recent price decrease is a symptom of a deeper problem.
If you’re looking for a safe place to invest your funds, you may want to consider putting your money into a passive index fund that either tracks the performance of the S&P 500 or the performance of an equally weighted basket of all the stocks in the S&P 500.
Why Does The Stock Market Care About Indy Car Racing?
When it comes to the economy, the stock market tends to focus on large-cap companies that it believes it can trust to keep investing in new products and expanding businesses. For decades, these large corporations have maintained steady earnings, delivered on time, and paid out a significant amount of cash to shareholders.
This has allowed the small-cap market to flourish. In fact, the Russell 2000, the benchmark for the small-cap market, is up more than 70% in value in the last quarter. So it’s not surprising that investors have taken a liking to companies that they believe are keeping the engine of the economy running smoothly. Additionally, small-cap companies, like Speedway, with a higher profit margin tend to be more nimble and able to react quicker to the Covid-19 pandemic and other global economic events.
The Safe Haven Effect
One clear example of the effect that Covid-19 has had on the stock market is the ‘safe haven’ effect. Essentially, investors want to get out of stocks and into something safer, and there’s a lot of demand right now for high-quality, defensive stocks. Companies that produce essential goods or services during the pandemic, like Procter & Pecter, Raytheon, and L3 Technologies, have all seen their stock prices increase due to increased demand and the lack of other attractive investment opportunities. While some of these stocks are quite volatile and likely to trend upwards or downwards depending on the day’s news, in general, defensive stocks have tended to benefit during and after the pandemic.
Passive index funds, which I discuss in more detail below, are essentially the opposite of this. They don’t really care about the specific earnings reports that come out each week. Instead, they track market averages, such as the S&P 500, and try to mimic the performance of that average. As long as the market averages stay within a reasonable range, investors can largely ignore the specific companies that are included in those averages. This makes passive index funds much more stable and less likely to experience large price fluctuations than more focused index funds that try to track the performance of specific companies or industry groups. With many investors scared to be in the market right now, having a passive index fund that just tracks the market is a perfect place for a first-time or even a re-invested investor to put their money.
The Performance Of The S&P 500 Over Time
If you’re looking for a place to invest your funds, you’ll naturally want to consider the safety of the investment as well as its ability to grow your earnings. You can calculate the overall safety of an investment by taking the amount of risk that you’re willing to take on and multiplying it by the expected volatility of the investment. The higher the multiplication, the more risk you’re willing to face.
The S&P 500 is a stock market index that tracks the performance of the 500 largest companies in the U.S. stock market. The best way to think of the S&P 500 is as a broad representation of the overall health of the U.S. stock market. So if you’re talking to someone who is new to investing and curious about the safety of stocks versus other investment vehicles like bonds or real estate, you may want to direct them to the S&P 500 for general information.
As mentioned above, the S&P 500 has performed well in recent years but this doesn’t mean that all is well. The price to earnings ratio of the S&P 500 is currently above its long-term average of 16.67, and this shows that, on paper, stocks are currently quite expensive. This could be a symptom of a deeper problem. In the last three months, the price of the S&P 500 rose by 14%, 8%, and 7%, versus 11%, 12%, and 11% for the three-month, one-year, and five-year averages, respectively. So, while the S&P 500 may appear safe and attractive right now, it might not be the best choice for someone who is looking for long-term security.
How Does Team Owner Chip Ganassi Feel About The Economy?
Another significant factor that you need to keep in mind when looking at a company like Speedway is how the management team of the company feels about the current state of the economy. One indication that you may want to investigate is whether or not Chip Ganassi, who owns the largest share of Speedway stock and serves as the CEO, has a vested interest in the company outperforming the market average.
Chip Ganassi, who has a net worth of around $13.8 billion, acquired a 22% stake in Speedway in 2012. Since then, he has steadily increased his share of ownership in the company until he now has a 32% stake. One of the reasons why Ganassi may be so invested in Speedway is the opportunity that he sees in the company to significantly increase his earnings by taking it public. If you take a guess at what Ganassi’s net worth would be if he went public today, it would be somewhere in the vicinity of $22 billion.
Ganassi is only 41 years old but has been involved with auto racing his entire life, first starting out in karting and then moving on to open wheel cars and Indy cars. He has won 16 Indianapolis 500 races and currently holds the record for most consecutive Indy Car victories with 28. He is also the owner of the premier open-wheel touring series, the IndyCar Grand Prix. For someone who has achieved so much at such a young age, it is no wonder that Chip Ganassi believes that the economy is improving. He also views the upcoming NBA season with optimism because he believes that many Americans are beginning to feel better about themselves and their financial situations. While the NBA, like the NFL, is a significantly safer bet than the stock market due to its fixed schedule and performance throughout the year, this doesn’t mean that it’s without risk. For example, the season opener between the Los Angeles Clippers and Toronto Raptors, which did not end in a decisive victory, saw a number of people on social media question whether or not it was a safe investment to own a team in either the NBA or the NHL given all the political upheaval and uncertainty that currently plagues both sports.
Is Speedway A Good Investment?
Based on the information available, it is not immediately clear whether or not you should invest in Speedway. On one hand, the stock has declined in the last quarter, but on the other hand, the value of the business has increased in the last three months. Additionally, considering the economy as a whole, the S&P 500, in general, has shown some positive signs in the last three months.
Taking all of this into account, it is not unlikely that you may see a rise in the stock price of Speedway in the coming months. The main issue for anyone who is looking for long-term security is that it is quite expensive compared to similar businesses, with a P/E ratio above its 10-year average. This likely means that, on paper, shareholders have a relatively low chance of recouping their initial investment.
If you’d like to learn more, I recommend that you read the following articles, which go into more depth about the various issues that investors may want to consider when valuing and trading the stock of an Indy car racing company: