Wednesday, February 21, 2007

The dangers of ultimate fighting stocks

Mixed martial arts, also known as ultimate fighting, is probably the most dangerous sport on television. Enjoying a huge surge in popularity, it's wooing major networks with it's ability to target the 18-35 year old male demographic that can be so difficult to reach.International Fight League (OTCBB: IFLI), one of the premier organizations in the field, has seen its share price shoot up from the low-single digits in November all the way up to 17 dollars, before the recent pull-back to Tuesday's closing price of $11.90. While it may be as exciting to watch, it may also be as dangerous as stepping on the mixed-martial arts star Jens Pulver.

The IFL has been riding high with contracts with Fox Sports Net and MyNetworkTv. That's what the company does. It produces live events and television shows. The hype and excitement reminds of the ever-so-briefly high-flying World Poker Tour Enterprises, which produces poker shows for the Travel Channel. Take a look at this chart above for WPTE (You may remember the bizarre disappearing bid for the company from poker legend Doyle Brunson)

The promotion and hype surrounding ultimate fighting has been similar of late. On January 12th, CNBC's "On the Money" featured a segment on IFL, and sport was also featured on the premiere episode of CNBC's new show "Business Nation."

The tremendous interest in mixed martial arts and the IFL is undeniable. I know numerous fans who follow the sport rabidly. However, the IFL was only founded in January of last year, is not the premiere "league" in the mixed martial arts field, and currently sports a market cap of more than 400 million dollars, without sizable tangible assets. By contrast, the WWE, which has a strong balance sheet and a 5% dividend yield, and has been a household name for decades has a market cap of 377 million dollars.

It's entirely possible, likely even, that the IFL will succeed. But there are numerous risks. What if the IFL turns out to be a fad, and young males (and therefore advertisers, and therefore the networks) lose interest.? What if other leagues come up and cramp on the IFL's style? After all, the IFL only started a year ago. What we do know is that the IFL is far less established than the WWE (or UFC for that matter), lacks a history of profitability, and is in a sport that is rabidly popular, but has not yet stood the time. What would have happened if you invested in roller-derby shows at their peak?

The bottom line is this: Shares of IFLI are trading on hype right now. A lot of people are excited about the potential (including, I suspect, many first-time, young investors), but there are really no fundamentals in existence to justify the stock's valuation. What if IFL is the next WWE? If it is, it is worth less than Mr. Market apparently thinks it's worth now. Wall Street is an expectations game, and the expectations for the IFL couldn't be much higher than they are right now.


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