April 5, 2007

Make a Bet on YouBet

From the Fool:

arely does a penny stock capture the attention of one of our Foolish founders. But that's what Youbet.com, which uses the Web to make it easier to bet the horses, has accomplished: David Gardner clicked outperform in Motley Fool CAPS in September, only to see the stock drop 19% in the months since.

What gives? A fourth-quarter loss didn't inspire confidence. And the Unlawful Internet Gambling Enforcement Act, which Congress passed at the end of September, had investors panic selling anything that connected the words "Internet" and "gambling." (See for yourself).

But David and the other professional and amateur investors participating in CAPS have remained patient:

For some, like CAPS investor gregous19, the thesis is simple. Quoting from his pitch for the stock:

"[Youbet] is safe from the anti-poker act by Congress. They have a license due to their horse racing, which makes their business the one and only legal one.... Gambling is the business where the house ALWAYS wins; become the house."

Good point. To that I'll add that, on the whole, analysts are extremely bullish about the long-term prospects for Youbet. They see 32% average annual growth over the next five years, which, when compared to the stock's P/E, results in an extremely attractive 0.71 PEG ratio.

That appears to be enough for management. Three different executives and directors, including CEO Charles Champion, have bought shares on the open market since last Wednesday.

But are expectations for 32% annual growth realistic? Why not? Most horseplayers I've seen -- and I've seen many in my varied excursions to Vegas -- grow roots in their seats as they bet on race after race after race. Most of these guys were last seen upright during a Joey Bishop performance.

Gregous19 is right; it's good to be the house when it comes to gambling. With a startlingly low PEG, a protected franchise due to government regulation, and a business where growth is practically

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