Mark Cuban Is Calling a Market Top

November was a big month for Mark Cuban...

First, he announced that he's departing the hit venture-capital TV show Shark Tank after his 13th season.

Then, just one week later, the tech billionaire said he's selling his beloved Dallas Mavericks basketball team to Las Vegas Sands (LVS) owner Miriam Adelson.

Speculation is now running rampant over what Cuban may be up to...

Some folks think he's gearing up for a presidential bid (despite his claims that he has "no plans" to run next year). Others see his recent decisions as a sign that he wants to dedicate more time to his family. Then, there are those who claim Cuban is exploring a new business venture... potentially one that includes bringing a Las Vegas Sands property to Texas.

However, what people seem to forget is that Cuban has a reputation as a shrewd investor... and that these steps might be a cautionary sign of what's to come in the stock market.

Today, we'll look at what may actually lie behind Cuban's recent moves. As we'll explain, there's good reason investors should take them seriously...

Cuban has a history of calling the market top...

Back in 1999 – in the midst of the dot-com bubble – he sold his Internet-radio startup Broadcast.com to Yahoo in an all-stock deal. It left Cuban with about $1.4 billion worth of the search giant's shares.

He wasn't legally allowed to sell the stock right away. Yet, he knew that holding that much of one stock was risky... especially a tech stock. At the time, the technology sector was running hot, and it could have collapsed at any moment.

Cuban worked with Goldman Sachs (GS) to protect his investment. Together, they created a "collar" trade, where he bought put options as a safety net. This ensured that he could sell his Yahoo shares for at least $85 per share if their value dropped below that price.

However, buying options can be expensive...

So, he offset the cost by selling call options at the same time. He agreed to a "strike price" of $205, which meant that if Yahoo stock rose above that price, Cuban would sell for exactly $205 per share.

This collar trade ended up costing Cuban nothing... and it saved him more than $1 billion.

You see, in the months after he set up this trade, Yahoo's stock price rose to a high of $237. If it had stayed that high, Cuban would've been forced to sell for just $205 per share.

While this capped his upside on Yahoo stock, it also protected him in the event the tech bubble burst... which it did.

Cuban had to wait to sell his stock, as the collar was set to expire roughly three years after he set it up in 1999. And by the time the collar expired, tech valuations were in the toilet.

The tech-heavy Nasdaq Composite Index had plummeted as much as 77%. Yahoo stock fared even worse. It fell from $237 per share to just $13... which meant Cuban saved his investment from a nearly 95% drop.

The deal for the Dallas Mavericks looks similar to what Cuban pulled with Yahoo...

Mark Cuban sold a majority of his stake in the Mavericks at a final valuation of $3.5 billion. That's a substantial increase from the $285 million he originally paid for the team back in 2000. Plus, Cuban will retain control over basketball operations.

In other words, while he still gets to take part in managing the team, his cash investment is now safe...

This could be a sign that Cuban is trying to sell high. If we enter a recession, sports teams could struggle to sell as many tickets and as much merchandise at their games as they do normally.

That could hurt team valuations, which could take years to recover. However, just like with Yahoo, he has protected his investment in case things go south for the Mavericks' valuation.

It's also not a big surprise to us that, on top of selling the Mavericks, Cuban is stepping away from Shark Tank...

We've repeatedly talked about why private equity is going to struggle in the coming years. When interest rates are high, small businesses (like the ones on Shark Tank) often struggle. That's because these companies don't have strong financials like larger companies... and it costs more to borrow money. Loans for running a business, growing it, or starting it up become pricier.

On top of that, when interest rates are high, consumers spend less because they're paying more for their own debts. This means they might buy less from small businesses.

Essentially, Cuban thinks times are getting tough...

While he might be better known as a TV personality these days... don't forget that he's also a great investor.

Some investors lost billions of dollars when the dot-com bubble burst. Yet, Cuban came out on top.

Now, when it seems like a recession is right around the corner, he's selling his beloved Dallas Mavericks and stepping away from a hit TV show.

If Mark Cuban is taking caution today, we recommend you heed his warning and be careful with your investments.

Regards, 

Joel Litman
December 12, 2023

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