One of the most difficult things to explain to a newcomer to thoroughbred racing is the phenomenon of the high prices paid for yearlings from first year stallions. In any rational market investors demand to get paid for taking on risk. However, in thoroughbred sales, buyers will usually pay a premium for the progeny of unproven first year stallions even though they are taking on the additional risk that the stallion will fail.
On average, the first yearlings of a stallion to go through the ring will be the most expensive yearlings the stallion will ever produce. Even though, it is also true that the stallion’s first yearlings will usually be out of the best group of mares that he will ever be bred to, there is no guarantee that these yearlings will prove to be a good value.
One of the reasons for the premiums buyers pay is the amount of media attention given to first year sires. Virtually every reporter spends an inordinate amount of time to covering the stallion’s progress and giving his opinion on what the future holds for said horses. This type of coverage creates a great deal of ‘buzz’ among industry professionals and amateurs alike. This ‘buzz’ attracts prospective buyers to look at foals by these stallions and eventually to purchase them.
Another reason for the premiums is the amount of advertising that farms do for their first year stallions. The goals of the stud farms is to fully recover their investment in stallions by the time the stallion’s first yearlings hit the track, in order to offset any risk to them. Therefore, they promote their stallions heavily in order to attract the largest group of mares possible during these first years. At the same time breeder’s flock to these stallions because they know that they will not find a better ROI than when selling foals by first time stallions, also at little additional risk to them.
The buyers of the yearlings end up taking on the risk of failure by racing the foals. This risk is compounded by the fact that they typically overpay for these horses. This was the case at the Fasig Tipton Select Sale earlier this year where the sale topper was a $1.6 Million Empire Maker filly, followed closely by the second most expensive foal, a $1.45 Million Mineshaft filly. Both these yearlings are by first year unproven stallions. Clearly the buyers of these horses are spending their money assuming that these stallions will be very successful. Why not wait and let the stallions prove their worth? Can anyone really justify spending these sums of money for unproven stock? Have the buyers of these yearlings forgotten Alysheba, Spectacular Bid or Dayjur, stallions that demanded high prices early in their careers and turned out to be failures at stud?
I do not mean, however, that there is no value to be found in purchasing yearlings by first year sires. Rather that value is more difficult to come by-especially at the top end of the market. Part of the problem is estimating the fair value in the progeny of unproven sires.
The most common method to value a new sire’s foals is to reference how those sire’s weanlings and short yearlings have been selling. This is the wrong approach because, as we have established, the market overvalues these prospects. The safer way to evaluate these yearlings is to carefully evaluate the conformation of the yearling and the quality and production history of its dam and give a value based on these two factors. Once a fair-value based on these two factors is established, a buyer should demand a discount that represents the additional risk she is taking on by purchasing stock of an unproven stallion. If this method is followed buyers can still find some value in first year stallions.
Thoughts on some of the new and more expensive Keeneland stallions for this year’s September sale:
Mineshaft ($100,000 fee) By AP Indy. He was a monster of a racehorse and he has all the right credentials to be a top stallion even at this price range. He represents the safest bet to stick around in the future. But at what price? Be leery about his early years at stud. Aptitude, also by AP Indy, has taken a couple of years for his progeny to show something at the track and Mineshaft is a good candidate to produce latter maturing foals. He did not win a stakes until his four year-old season. Next year or the year after would be a better time to buy yearlings by him, after his two year-olds show a lack of early ability.
Empire Maker ($100,000) by Unbridled. A very good three year old. This guy has been over hyped since the day he was born. His dam is the great mare Toussaud, he could not be better bred. Unbridled was a horse that could produce great horses but his overall numbers were not fantastic. This stallion is late maturing, without early turn of foot and his bottom half of the pedigree suggest distance and grass. His half brother Chester House died early and showed little at stud. With a weanling average of close to $900,000 everything has to go very right for him to be at that level in a couple of years.
Vindication ($60,000 fee) By Seattle Slew. Although this guy is no AP Indy, he was a very solid juvenile runner winning the Breeder’s Cup Juvenile. He is a well-built horse, although more refined and with less bone than AP Indy. Comes from a line that has produced great horses like Slew O’Gold, Seattle Song, Slew City Slew, Doneraile Court and Event of the Year but none of those were great in the breeding shed, AP Indy being the sole exception. With a yearling average expected in the $300,000 range, save your money and buy a nice something else by a proven sire.
Aldebaran ($40,000 fee) By Mr. Prospector. Hard to knock one by Mr. Prospector. Aldebaran was one of the best and most consistent sprinters of the past few years. But this horse was a late developer without early speed. It was not until his 5 year-old year that he won a grade 1 stakes. Of course, being by Mr. Prospector he should sire early and speedy foals but there is still a risk that they will be late maturing. It may be wiser to wait and see what kind of a sire he turns out to be. Having said that, at this fee level, some yearlings by him may still offer value.
Sky Mesa ($30,000 fee) By Pulpit. Great looking early maturing horse who won the Hopeful at 2. Injury prevented him from following up on his three year-old campaign. Better fee range can offer value at the sales but outstanding physical individuals by him will still demand high premiums. Interesting prospect.
Other prospects that stand for below $20,000 will be more likely to offer the best opportunities for buyers who want to invest in new Stallions. Stallions such as Harlan’s Holiday, Proud Citizen, Yankee Gentleman and Kafwain as well other regional stallions may provide value to daring buyers. But the best value a buyer can obtain will always come from proven sires!
Buyers should always demand a premium for taking on the risk for trying out these new stallions. The buyers are the ones that have the least to gain from making a success out of these first year sires and they are the ones that have the most to lose if these stallions prove to be failures.
Monday, September 11, 2006
Wednesday, September 06, 2006
Thoroughbreds: A bubble market that continues to race
Where have all our bubble markets gone?
The internet boom has long past and the housing market is about to experience what some foresee as a soft landing and others a hard crash. But there is one market that continues to rally against all logic – the racehorse market.
On Monday, September 11, the Keeneland Yearling Sale, the largest sale of thoroughbred racehorses in the world, will begin in Lexington, KY. More than 5,000 horses will go through the ring during the sale’s 14 days. It is the premier sale of thoroughbreds in the world.
This market has experienced amazing growth in the past five years. The mean price for a thoroughbred has risen an incredible 60% from $25,000 in 2001 to $40,000 in 2005. While the average price reached a record high of $108,420 at last year’s sale which included a sale topping colt that sold for $9.7 Million.
These prices, mind you, are for unproven one year-old thoroughbreds that have yet to run a race at the track. All a buyer can do to evaluate these horses is to review the pedigree page printed on one of the seven catalog books given out by Keeneland to prospective buyers and to inspect the horse’s physical attributes. It is a little like drafting 8 year-old boys to play as adults for NFL teams - it’s all guess work at this stage!
But this market is an international melting pot that brings together buyers and sellers from all over the world and from all walks of life. From kings of faraway lands to small investment syndicates from New Jersey, there is something for everyone at Keeneland. With more than 5,000 horses to be sold, all these buyers come here with the realization that greatness is present - all one needs to do is find it.
Many reasons are given to explain this dramatic increase in prices; one explanation is the increase in the formations of syndicates and partnerships that poll money from smaller investors and provide them access to stock that they would not be able to afford on their own. The benefits of partnerships are many for the individual owner. It allows them to participate in better stock, diversify their investments and reduce their monthly expenses in the upkeep of each horse. These syndicates have attracted a whole new breed of owners who would not otherwise participate in the sport.
In addition, Arbitrageurs, known in horse racing as “pinhookers” have become more active in the yearling sales. They purchase yearlings and sell them the following year in sales for two year-olds in training. At these two year-old sales buyers have the advantage of seeing these very young horses run at speed for a short distance and any hint of ability can skyrocket a horse’s value into the millions of dollars. Early this year a two-year old in training sold for $16 Million Dollars at one of these sales and it is not extraordinary for some of these pinhooking operations to boast an average return of 18% or more on their websites. With returns such as these, more and more players are involved in this activity and dreams of hitting the next homerun keep them pushing the prices of yearlings up.
Other reasons are more extrinsic to the sales: the high price of oil, the strength of the markets, the weak dollar that attracts international buyers etc., but few of these reasons, if any, have to do with the earning potential of the racehorses themselves. The realities of the sport are that purses at tracks are stagnant and on-track attendance is at an all time low. With the exception of a few regional programs that are successful and the promise of video lottery terminals at some tracks; the prospect for horses to earn back their purchase price at the track remains bleak.
The other avenue for return of investment for buyers is the value of their prospects for breeding. Prices of stallions and mares have been rising at an impressive pace. As an example, in 2002 Came Home retired with a stud fee of $40,000 as the most expensive stallion to retire that year. In 2006 Ghostzapper retired at $200,000, a fee usually reserved for the very best stallions whose progeny has proven time and time again that they can run with the very best. The value of these fees pushes the value of stallions to the stratosphere and the price of well bred yearlings has risen accordingly. But the reality is that of the thousands of yearlings that go through the ring, only a handful will be worthy enough to stand at stud.
Females have also increased in value in the past few years dramatically. A great number of fillies purchased at this sale retire after racing to continue their careers in the breeding shed. Their prices, as well as the prices for Stallions, rise and fall in relation with the prices of yearlings. When the yearling markets are hot, breeders are able to pay more for breeding stock and stud fees and their prices rise accordingly. It is a cycle that artificially creates high prices in every sector and creates the problem that when one of these sectors suffers, they all follow suit.
Thoroughbreds are a high-risk game that can offer high rewards, both financially and emotionally, but the game is becoming more and more expensive to play and there is no apparent good economic rational to explain this. But as the Keeneland sale opens its doors, the world will hold its breath and open its pocket books wider than ever in search of the next Derby horse regardless of the price.
The internet boom has long past and the housing market is about to experience what some foresee as a soft landing and others a hard crash. But there is one market that continues to rally against all logic – the racehorse market.
On Monday, September 11, the Keeneland Yearling Sale, the largest sale of thoroughbred racehorses in the world, will begin in Lexington, KY. More than 5,000 horses will go through the ring during the sale’s 14 days. It is the premier sale of thoroughbreds in the world.
This market has experienced amazing growth in the past five years. The mean price for a thoroughbred has risen an incredible 60% from $25,000 in 2001 to $40,000 in 2005. While the average price reached a record high of $108,420 at last year’s sale which included a sale topping colt that sold for $9.7 Million.
These prices, mind you, are for unproven one year-old thoroughbreds that have yet to run a race at the track. All a buyer can do to evaluate these horses is to review the pedigree page printed on one of the seven catalog books given out by Keeneland to prospective buyers and to inspect the horse’s physical attributes. It is a little like drafting 8 year-old boys to play as adults for NFL teams - it’s all guess work at this stage!
But this market is an international melting pot that brings together buyers and sellers from all over the world and from all walks of life. From kings of faraway lands to small investment syndicates from New Jersey, there is something for everyone at Keeneland. With more than 5,000 horses to be sold, all these buyers come here with the realization that greatness is present - all one needs to do is find it.
Many reasons are given to explain this dramatic increase in prices; one explanation is the increase in the formations of syndicates and partnerships that poll money from smaller investors and provide them access to stock that they would not be able to afford on their own. The benefits of partnerships are many for the individual owner. It allows them to participate in better stock, diversify their investments and reduce their monthly expenses in the upkeep of each horse. These syndicates have attracted a whole new breed of owners who would not otherwise participate in the sport.
In addition, Arbitrageurs, known in horse racing as “pinhookers” have become more active in the yearling sales. They purchase yearlings and sell them the following year in sales for two year-olds in training. At these two year-old sales buyers have the advantage of seeing these very young horses run at speed for a short distance and any hint of ability can skyrocket a horse’s value into the millions of dollars. Early this year a two-year old in training sold for $16 Million Dollars at one of these sales and it is not extraordinary for some of these pinhooking operations to boast an average return of 18% or more on their websites. With returns such as these, more and more players are involved in this activity and dreams of hitting the next homerun keep them pushing the prices of yearlings up.
Other reasons are more extrinsic to the sales: the high price of oil, the strength of the markets, the weak dollar that attracts international buyers etc., but few of these reasons, if any, have to do with the earning potential of the racehorses themselves. The realities of the sport are that purses at tracks are stagnant and on-track attendance is at an all time low. With the exception of a few regional programs that are successful and the promise of video lottery terminals at some tracks; the prospect for horses to earn back their purchase price at the track remains bleak.
The other avenue for return of investment for buyers is the value of their prospects for breeding. Prices of stallions and mares have been rising at an impressive pace. As an example, in 2002 Came Home retired with a stud fee of $40,000 as the most expensive stallion to retire that year. In 2006 Ghostzapper retired at $200,000, a fee usually reserved for the very best stallions whose progeny has proven time and time again that they can run with the very best. The value of these fees pushes the value of stallions to the stratosphere and the price of well bred yearlings has risen accordingly. But the reality is that of the thousands of yearlings that go through the ring, only a handful will be worthy enough to stand at stud.
Females have also increased in value in the past few years dramatically. A great number of fillies purchased at this sale retire after racing to continue their careers in the breeding shed. Their prices, as well as the prices for Stallions, rise and fall in relation with the prices of yearlings. When the yearling markets are hot, breeders are able to pay more for breeding stock and stud fees and their prices rise accordingly. It is a cycle that artificially creates high prices in every sector and creates the problem that when one of these sectors suffers, they all follow suit.
Thoroughbreds are a high-risk game that can offer high rewards, both financially and emotionally, but the game is becoming more and more expensive to play and there is no apparent good economic rational to explain this. But as the Keeneland sale opens its doors, the world will hold its breath and open its pocket books wider than ever in search of the next Derby horse regardless of the price.
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