Stock Tips

"Tom, I’m gonna buy some call options on Sketchers," said a
familiar voice on the phone, "and you should too. I was
just playing poker in Vegas with a guy who seems to know a lot about
the company and he thinks the stock will double by
Thanksgiving."

"Interesting."

"Can you buy them for me? I’m already on my way to Panama
and I can’t get through to my broker. I want to spend
$3000. You want in?"

Your editor placed the order as instructed, but politely
declined acting on the "hot tip" for his own account.

We had already learned our lesson…the hard way. Years
earlier, we bought stock in a company on the basis of a
tip. On that occasion, we were told by a guy who seemed to
know something that this particular company’s earnings
results – due out 10 days later – would be phenomenal.

We were so persuaded by the tipster’s strong conviction
that, the next day, your editor took a small position in
the stock. But things didn’t go as planned – and for the
next seven or eight trading days, the stock tanked. Come
the day of the earning’s announcement, we’d lost over 25%
of our investment.

Then the results came out, and just as our contact had
said, they were very good…

But not good enough to boost the share price one iota!

We gave it a week, and then sold our position at a big
loss, swearing never to invest in a hot tip again.

"A man must believe in himself and his judgment if he
expects to make a living at this game," said celebrated
stock operator, Jesse Livermore. "That is why I don’t
believe in tips. If I buy stock on Smith’s tip, then I must
sell those same stocks on Smith’s tip. I am depending on
him."

This advice is applicable to all forms of gambling. But
nowhere are tipsters more prevalent than at the horse
track. We found a book on horse racing tucked away on a
bookshelf, titled "How to win at the Races," by Sam ‘The
Genius’ Lewin. We wondered what he had to say about tips…

"All sorts of ‘inside’ information float around at race
tracks," explains Lewin. "It supposedly comes from
trainers, jockeys, grooms, exercise boys, ushers, track
policeman, and others thought to be knowledgeable about
horses. And if you are really lucky, you might run into a
‘tout,’ who – for a fee – can be persuaded to give you the
‘real inside.’

"Some of that kind of information – a very little of it –
might be of use to the average bettor," Lewin continues.
"The rest is worse than useless. Me, I’m death on most
‘tips’; I don’t want any part of them."

And nor did we want any part of this Sketchers trade… but
we told the voice on the phone we’d be happy to put the
trade on for him. We bought 25 contracts of the January
2005 $15 call option at $1.20 a piece. At that time, the
stock was trading at around $13.

The stock made a run at the strike price, and after a
couple of weeks, the options moved into profit. He should
have sold then, but didn’t; the options soon fell away,
expiring worthless.

"Nevermind," he said to us recently, "I took at least five
grand off that guy in the poker game. And besides, we were
in Vegas…he was probably just some gambler trying to ramp
up a stock position…"

Did You Notice…?
By Tom Dyson

Internet Poker is big business.

According to an article in last week’s edition of Barron’s,
the online poker industry generates about $2 billion a year
in revenue, equivalent to 40% of the gambling revenue
generated by the entire ‘Strip’ in Las Vegas last year.

"The growth of online poker has been explosive," says
Barron’s. "Industry revenues have doubled in the past year,
and are up more than tenfold in the past two years. The
number of players tripled in 12 months, and continues to
grow by about 10% a month."

Your Baltimore-based editor has been playing online poker
for over three years, and can personally vouch for this
growth. But will it keep up?

"We believe there are 100 million poker players worldwide
today, and only about 1% of them play online," says the CEO
of Sportingbet, owner of the third largest poker site on
the net. "You don’t have to be a rocket scientist to see
there is the potential for very significant growth online,
indeed."

Sportingbet [LSE:SBT.L] generates 40% of its revenues from
its internet poker site, Paradise Poker, making it the
purest online poker play in the market. As the nearby chart
shows, its stock has nearly trebled since October 2004,
when it acquired Paradise Poker.

What is more, Sportingbet isn’t expensive. According to
Barron’s, Sportingbet was trading for about 10-times
annualized pre-tax cash flow in the quarter ended January
31. "That’s below the valuations of some U.S. gaming
companies," says the paper, "which are growing more
slowly."

From where we’re sitting, things look pretty good for
Sportingbet, except for the fact it’s on the front page of
Barron’s…

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And the Markets…