The Derby Trade

Apr.25.09 | About: Churchill Downs, (CHDN)

The Kentucky Derby, held on the first Saturday in May, is coming up next Saturday, and the venue that holds the race is a publicly traded company -- Churchill Downs (NASDAQ:CHDN). Churchill Downs went public in 1993, and on a pure price performance basis, it's only up 8.5% since its IPO.

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We checked to see how the stock trades in the week before and after the Derby to see if it follows a "buy the rumor, sell the news" pattern. Interestingly, the average performance of the stock in the week before the Derby (Friday close to Friday close) has been 1.77%, while the average performance of the stock in the week after has been -1.32%. Investors who have bought the stock in anticipation of the event have done much better than those buying the stock after the event.

We calculated the return of a $100 investment in a Derby strategy that buys the stock in the week before the Derby and shorts the stock in the week after the Derby and found that it would now be worth $156.74 (or +56.74%) without commission costs. Historically, this stock strategy has probably been a lot better than betting the actual horses at the race!

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