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By Christopher Davis | 06-20-2012 03:00 PM

Rogers: Sports-Related Stocks a Score

Ariel's John Rogers discusses recent opportunity in Madison Square Garden and International Speedway, as well as the firm's analytical adjustments in the wake of the financial crisis.

Christopher Davis: I'm Christopher Davis, a senior mutual fund analyst at Morningstar, and I'm here at the Morningstar Investment Conference with John Rogers. He's the founder of Ariel Investments and also is the veteran manager of the Ariel and Ariel Appreciation funds.

He employs a relatively concentrated, value-oriented strategy and has delivered fine long-term records at both funds, and I'm glad to have you here today, John.

John Rogers: Glad to be back.

Davis: Well, I was looking at your website the other day, and you have an article about sports, and you reference that the Dodgers recently went for $2 billion or was that $2 billion?

Rogers: Yeah.

Davis: And so it's big business and it's something that you as a value investor have been able to tap into. Obviously as a public fund, you can't buy sports teams, but how are you benefiting from the sports theme?

Rogers: Well, it really does fit within in our circle of competence. I joked that I was a vendor at Wrigley Field and Sox Park for six years, and so got to know a lot about sports through that, and then I got to play basketball at Princeton, and got to be in a lot of great arenas. And so sports has been a passion of mine for a long time.

But today there have been so many bargains that have crept into the sports world. First it was Madison Square Garden for us. Back when the NBA lockout was going strong, people got very fearful and they thought that the whole season would be lost and the stock price drifted lower; people got very discouraged. We came to the conclusion that eventually someday that strike would end or the lockout would end. The Knicks would be back playing in the Garden again, and all the other teams that will be there, the Rangers, the Liberty as well as the concerts and things like that, would fill that arena on a regular basis.

The Garden, they spent over $900 million to renovate it, and they got enormous pricing power. So it fit that whole Warren Buffett message around how big is the moat. When they raised prices, people kept coming, people wanted their season tickets, people wanted their SkyBoxes. There really isn't any other "across the street" from Madison Square Garden, the world's greatest arena.

And then finally we got a break when Jeremy Lin got to be such a sensation. He was right at the midst of them renegotiating their television contract with the local cable networks, and they were able to leverage that to get the kind of pricing that was so valuable to the overall value of Madison Square Garden.

Davis: I think you are the first manager I've talked to that's benefited directly from Linsanity?

Roger: It's true. It's absolutely amazing. We went to visit right before they signed that contract, got a chance to see Jeremy Lin play and walk through the Garden, and it really was a very direct benefit that he did so well for that short period of time.

The other sports-related company also has a television aspect to it. We own International Speedway--that's closely affiliated with NASCAR. And similarly they have these huge arenas. I went to visit the arena in Daytona, and I'm going to the one in Joliet soon, and they have Talladega, and they have so many venues around the country. They are these huge places; some of them seat well over 100,000 fans, and those are very hard to replicate, very hard to duplicate. To replicate the relationship with NASCAR is, we think, next to impossible. And people are very fearful the next contract won't go well. But we find that the ratings have been holding up well with NASCAR, and we think it will be a surprise on the upside, the kind of contract they are able to renegotiate in the next year or so. And when you think about it, live sports are so valuable to the networks, even in this TiVo age. People don't want a TiVo their basketball game or their race that's going on. They want to watch it live and not miss a moment, and so that's why these contracts are so valuable and why they keep going up in price and surprising people.

Davis: Another topic that you also discuss on your website is the euro crisis, and it seems to be the opinion of your firm that this is kind of a Europe issue, isn't likely to wash up on the shores of the U.S.

Is that still something that you are thinking about, and how do these larger, bigger-picture macro ideas play into your strategy?

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