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Investing in Olympic Gold

|Includes: DOW, GE, KO, MMM, PCRFY, Ralph Lauren Corporation (RL), RY, SU, V

The Olympics are about emotions, proclaims David Lauren, executive of Polo Ralph Lauren (NYSE:RL), the company that outfitted the American athletes for their march into Vancouver’s BC Place Stadium last week for the spectacular opening ceremonies of the 2010 Winter Olympics. That certainly seemed true, as the crowds cheered and flags waved for athletes of countries large and small, including many countries that had never won an Olympic medal and the tropical and desert nations that had never seen a snowflake falling from the sky.

But if the Olympics are a boost to the sporting spirit, the cities, countries and companies that sponsor them are hoping that they may also be a boost to their bottom line. “There’s no better exposure for a brand than the Olympics,” Lauren told an interviewer in Vancouver. And so it’s not surprising that Polo Ralph Lauren, which also provided the official outfits for U.S. athletes in Beijing’s summer Olympics, had already begun selling jackets, hats and sweaters in its U.S. Olympics Collection three weeks before the opening ceremonies. The company has engaged in a major marketing campaign that coincides nicely with victories by American stars of the slopes and the half-pipe. David Lauren says the product is flying off the shelves.

The Olympics, then, can be an investing opportunity: for the host city or country, for the sponsoring companies, and for the individual investors who are looking for winners in stocks as well as athletic competitors. For example, as I predicted right here on Seeking Alpha, the Beijing summer Olympics proved to be a boost for the swimwear company Speedo, a subsidiary of the publicly traded company Warnaco (WRC), based in the U.S. Everyone wanted those sleek, high-tech LZR racer suits made by Speedo that apparently helped Michael Phelps and other swimmers break world records and win gold medals. Warnaco stock jumped even before Michael Phelps dove into the water for his first race.

The city of Vancouver obviously considered the 2010 Olympics a potential boost for its own bottom line, despite escalating costs. As of February 1, the total cost of the games, including infrastructure improvements for the region were estimated to be as much as US$6 billion with US$600 million of the spending directly related to hosting the games. But for those looking for the cost/benefit ratio, the long-term rewards appeared promising. The projected benefits and revenue to the city and province were said by some estimates to be as much as $10 billion, although a study by accounting firm Price-Waterhouse indicated the direct revenues would be in the range of $1 billion.

What investors, from cities and countries to individuals, are actually looking for is something that is not so easy to pin down in numbers. And that is the “halo” effect of being part of an event that has global impact. For Nike (NYSE:NKE), for example, having millions of viewers eyeballing that Nike Swoosh on Apolo Ohno's streamlined torso as he zips around the short track -- priceless. If you take a look at Nike's chart since the opening ceremonies, it looks like a nice upward slope.

For those who prefer numbers, however, there is an index for measuring Olympic performance of companies rather than athletes. The Dow Jones Summer/Winter Games Index (which you can follow with the symbol DJOLX) measures the performance of publicly traded companies that are official partners, sponsors and suppliers of the current Olympic Games. Its 36 members, with a combined market cap of US$967 billion, include some of the world’s leading firms. The top components in the Olympic index are General Electric Co. (NYSE:GE), McDonald’s Corp. (NYSE:MCD), Royal Bank of Canada (NYSE:RY), Coca-Cola Co. (NYSE:KO), 3M Co. (NYSE:MMM), Suncor Energy Inc. SU), VISA Inc.(NYSE:V), Panasonic Corp. (PC), Dow Chemical Co (NYSE:DOW). and General Mills Inc. (NYSE:GIS).

As of February 10, the index is up 36.46% since December 22, 2008, when the index components were changed to reflect the Vancouver games. Compare that to the Dow Jones Industrial Average in the U.S., which rose 17.82%.  Obviously, there is some sort of advantage to being an Olympic sponsor, although it is not clear whether this is a chicken-or-the-egg story. If a company can afford to be a sponsor, then it must already have a decent cash flow and a strong commitment to promoting its brand. Unfortunately, there is no ETF corresponding to the Games Index, so you'd have to buy stocks individually to take advantage of the games effect.

An intriguing paper from the U.S. National Bureau of Economic Research suggests that hosting mega-events like the Olympics may yield long-ranging benefits – mainly that of boosting national exports -- that were not counted in the initial calculation of the cost/benefit ratio. A paper by Andrew K. Rose and Mark M. Spiegel found that the positive effect on exports was “statistically robust, permanent, and large; trade is around 30% higher for countries that have hosted the Olympics.” The researchers conclude that the Olympic effect on trade is attributable to the “signal a country sends when bidding to host the games,” rather than the act of actually holding a mega-event. The researchers’ most startling finding is that unsuccessful bids to host the Olympics have a similar positive impact on exports.

This conclusion that making the effort to compete is as important as actually winning may be a very heartening message to all those aspiring athletes who participate in competition against all odds, without the hope of winning a gold medal. 

 

 

Disclosure: Long RBC

Disclosure: Long RY