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Friday, June 12, 2009

Youbet.com to Join Russell 2000 Index

We continue to like Youbet.com (UBET, $2.77) because of the company's leading market position, growing revenue and free cash flow, and attractive valuation. Even after the recent share price recovery, the 2008 equity free cash flow yield is still 12% and, for reasons previously detailed in our blog, we believe shares could fairly trade at sub-10% levels on estimated 2009 free cash flow of $15 million. A 9.0% 2009E FCF yield would imply a share price in the low $4s.

In addition to reporting healthy handle (wager) results from the Triple Crown races (links here), additional good news surfaced this evening: Youbet made the cut to join the Russell 2000 index, which is a small-cap oriented index widely followed by investment fund managers. The inclusion is purely mathematical (based on market cap size), yet means shares of Youbet will likely see increased near-term demand as funds that strive to mimic the Russell 2000 index will purchase shares so that their portfolios largely represent the new constitution of the Russell 2000 beginning on June 27th. The Russell methodology can be found here.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long UBET.

© 2009 Jeffrey Walkenhorst
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