The Year of Alternatives: Gotta Collect ‘Em All

The Year of Alternatives: Gotta Collect ‘Em All

This year has seen most of the equity market fully recover from March lows, some stocks and benchmarks have even reached new all-time high territory. As of the market close on 11/13/2020 the only sectors, as represented by S&P 500 SPDR ETFs, in negative territory YTD are Energy (-41%), Financials (-10%) & Real Estate (-1%); as depicted in the graph below.

This chart was created on the Koyfin platform.10

This chart was created on the Koyfin platform.10

Furthermore, the fixed income market is offering low yields on government issues as depicted in the graphic above, increasing investor desire to look for returns in other markets. An increasing amount of both attention and capital allocation to alternative investments has been a theme in 2020. For example, Bitcoin, gold and silver have all had stellar returns YTD, as stated in my last write up: https://almondconfirmed.com/the-economy/2020-the-end-of-an-era/ . I believe this continued search for return is one factor in the collectable market’s surge this year.

The last few months have seen large personalities, and known millionaires, enter the collectible card market as a hobby and or an investment. In late June, Gary Vaynerchuk, an entrepreneur, author, speaker, and Internet personality with a net worth over $100M, posted a video to YouTube on sports card investing; in late August he posted another video focused on Pokémon card investing. Then came Logan Paul, an American YouTuber, actor, and social media personality with close to 23M followers (the 8th highest Youtuber subscriber count as of writing) and a net worth near $20M. In early October Logan purchased the most expensive box of Pokémon cards ever sold (at the time), with a total price tag over $200K. Logan went on to stream a live unboxing event in collaboration with the National Alliance on Mental Illness (NAMI), selling 35 of the 36 packs for $11,111 apiece and raising over $135K for the fundraiser.1 Later in October Logan purchased a 1st Edition 1999 Charizard Holographic Pokémon card rated a Gem Mint PSA 10, from a known collector for $150K cash.

To be clear, that was a single trading card sold for $150,000 USD. But even that historical sale was quickly topped; one of my personal favorite rappers, Logic, also purchased a 1st Edition 1999 Charizard Holographic PSA 10 card in October of this year, paying a whopping $226,000.8 That price is a testament of the rarity of the card in question. A card given a grade of PSA 10, as the company website describes it, is a “virtually perfect card.” As of writing there are exactly 120 English 1st Edition 1999 Charizard Holographic Pokémon cards graded a perfect PSA Gem Mint 10 in the world; this implies a $27 million dollar market cap for this card in perfect condition.

This image was obtained from the PSA website.2

While these examples are particularly large, they are not one-offs, there have been a subjectively surprising number of collectible cards worth hundreds or thousands of dollars sold each day as investors, collectors, and traders all enter the domain. The core avenues to facilitate trade of these collectibles have been online peer-to-peer marketplaces such as eBay (Ticker EBAY), and online auctions such as PWCC.

Given the greater online exposure, the markets for professionally graded collectible cards, factory sealed boxes of cards and factory sealed packs of cards have gone up dramatically these last few months. I believe an increased sense of credibility has been added to this alternative investing niche by the professional grading services. Arguably the most well-known grading service, PSA (“Professional Sports Authenticator”) owned by Collectors Universe Inc. (Ticker: CLCT) has been providing grading services since 1991. Additionally, the firm offers online price guides and population reports that can aid collectors in assessing the potential value of a collectible item.2 Their main competitor is BGS (“Beckett Grading Services”) a private company that began in 1979 by publishing Baseball Card Price Guidebooks and then expanded into grading services in 2001.3 These two firms add both grades and an implicit assurance against counterfeit product, which have helped ignite this alternative market boom.

The graphic below is from PokemonPrice.com, a PSA graded Pokémon price guide. The website collates PSA Pokémon sales data from eBay. The chart shows PSA graded sales data for the highest three ratings of the complete 1st Edition Base Set (the first version of Pokémon cards sold in the U.S. in 1999).

This graph was obtained from PokemonPrice.com.6

The complete 1st Edition Base Set in Gem Mint grade 10 was valued around $100K at the end of 2019; as of October, valuations for this set stood well over $250K. Furthermore, both the sale count and the sale value of PSA rated Pokémon cards have skyrocketed this year as shown in the graphic below.

This graph was obtained from PokemonPrice.com.6

From December of 2019 to September of 2020, the monthly PSA rated eBay Pokémon sale volume has increased 250%. Meanwhile sale value soared from $353K in December to $7.3M in September, a 1,954% increase.

Perhaps the past mysterious subjectivity of a trading card’s worth is evolving into something more uniform, more investable. A few fundamental price factors include: the vintage of the card, the condition of the card, the amount of cards assumed to exist, the amount of cards of that kind that have been graded, and historical popularity for a particular card. However, these price increases have been staggering and the recent trend could just be a temporary one – a quarantine related price bubble kickstarted by online celebrity interest. But I believe the hype could rage on, as just this week (11/10/2020) Steve Aoki announced he would be hosting a Pokémon TCG box opening live on Twitch featuring Logic, Logan Paul and Rob Kardashian.8

That being said, I do not think investors should allocate capital directly in collectables unless there is a true personal admiration for the asset(s) in question. To not follow that suggestion would be akin to purchasing a painting that you did not actually find appealing, in a hope to sell it for more money in the future. Instead, there may be an alternative way to invest in alternative assets. The public stock Collectors Universe, Inc. (Ticker CLCT) could provide a more conservative approach to speculate on a continued interest in this niche alternative market.

Collectors Universe is a “leading provider of value-added services to the collectibles markets. The Company authenticates and grades collectible coins, trading cards, event tickets, autographs and memorabilia (“collectibles”). The Company also compiles and publishes authoritative information about United States and world coins, collectible trading cards and sports memorabilia and operates its CCE dealer-to-dealer Internet bid-ask market for certified coins and its Expos trade show and conventions business.” In their 2021 Q1 report, Collectors Universe reported their total sales rose to $31M, up 52% YoY. More specifically, their trading card/autograph segment was up 130% YoY reaching $19M. Earnings per share also rose dramatically, from $0.40 in 2019 Q3 to $0.66 in 2020 Q3, a 65% YoY increase.5 While this growth has been amazing, it has not gone unnoticed in the market. The fundamental highlights, shown in the graphic below, depict the relatively pricey valuation level of CLCT stock. Keep in mind, the S&P 500 had a trailing 12-month P/E ratio of 31.24X and a Price to Cash Flow ratio of 22.65X as of 10/30/2020.9

This chart was created in Microsoft Excel using data from EDGAR.5

Nonetheless, Collectors Universe is small enough that a continued interest in the collectibles market, as an investor, a collector or both, could be very impactful to their business. The CEO stated that the firm had a record backlog in the PSA division entering their fiscal second quarter. Furthermore, the firm recently leased an additional 62,870 square feet of operating space next to their headquarter facility, essentially doubling their square footage; suggesting insider optimism for continued growth.7 No matter the future of these alternative niche markets discussed, it is vital investors do their homework and know what they are investing in. Whether that be a public stock or a pack of Pokémon cards.  

Disclaimer: I am invested directly in Pokémon products as well as the following stocks related to this article: Collectors Universe, Inc. (Ticker: CLCT), eBay Inc. (Ticker: EBAY), Alphabet Inc. (Ticker: GOOGL) and Nintendo Co., Ltd. (ADR Symbol: NTDOY).

https://almondconfirmed.com

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