Fantex Takes A Faceplant

| About: Fantex (FANTEX)

Not 3 weeks have passed and the cracks are already starting to show in these "athlete" stocks offered by Fantex, Inc. If you missed my write-up, I told you all about the potential risks anyone buying pro athlete stocks would be facing.

In the article, I told you the main issue facing buyers of these "stocks" would be due to the offering company itself: Fantex. If you don't recall, I warned potential investors that the "exchange" that these stocks would be run on would be operated by the company that issues the stocks themselves. A bit of a conflict of interest if you ask me.

The questions just mount up in no time. How is the exchange regulated? How are bid/ask spreads determined? Who makes the market if no sellers or buyers are present? You see, these are all easily answered questions and well-regulated concerns when you trade stocks on organized open markets such as OTC, NASDAQ, NYSE, etc.

But back to the latest issue at hand, the unthinkable has just happened.


This weekend, we learned that Fantex's initial high profile athlete IPO would be facing a serious headwind when the Houston Texan's star, Arian Foster, would be in surgery for season-ending lower back surgery. Well, that's probably not the start Fantex was looking for, given they were holding the IPO by the end of this month. So what do you think would happen to this stock if it were traded on the open market?

To be fair, we need to compare Arian Foster to any other "company." If we take the football star's season-ending injury and equate it to a company event, it would we be fair to say this event would be equivalent to a complete shutdown of a company's retail stores (if that were their business)?

Well, maybe not…

Foster is still making money from his contract and from current endorsement deals. Exactly to what extent, we don't quite know. And if I were investing in Arian Foster, I'd love to have access to his contracts and endorsement agreement contracts before I invested. But I think it's fair to say this would be the equivalent to a huge reduction in future EPS.

I'd say that's pretty fair. So what would happen to the value of the Arian Foster stock?

Well, if it were traded on the open market, I can guarantee you we'd see the stock slaughtered the next day or two… down 30, 40, or even 50%. That sounds pretty horrible for investors… right?

Well not so fast. The company's risk disclosures explain the following facts about what you're buying when you invest in a tracking stock. Here's the skinny-

Each Fantex Inc. tracking stock is intended to track and reflect the separate economic performance of a specific brand contract that Fantex has signed with an athlete. However, holders of shares of a Fantex Inc. tracking stock will have no direct investment in that brand contract, associated brand or athlete. Rather, an investment in a tracking stock will represent an ownership interest in Fantex, Inc., as a whole. These tracking stocks are offered only through Fantex Brokerage Services [FBS]. FBS cannot assure you as to the development or liquidity of any trading market for these stocks."

In essence, you're not even investing in what you think when you purchase a specific athlete's tracking stock. You're just buying shares in Fantex, Inc. And right now, that's looking like a worse investment than it even did before.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.