We recently compiled a list of the 8 Best Golf Stocks To Invest In According to Hedge Funds. In this article, we are going to take a look at where Topgolf Callaway Brands Corp. (NYSE:MODG) stands against the other golf stocks.
The golf industry has gained immense popularity for various reasons, making it a significant part of global sports culture. According to the National Golf Foundation, golf’s international reach is estimated at 123 million. In the US, over a third of the population aged 5 and older engaged with golf in 2023, a 30% increase since 2016. Its appeal lies not only in the challenge it presents, requiring skill, strategy, and patience but also in the social and recreational aspects it offers. Its inclusion in international events like the Olympics has contributed to its widespread acceptance and growth, attracting diverse demographics across different countries.
As reported by Grand View Research, the global golf equipment market, valued at $7.48 billion in 2022, is expected to grow at a 5.0% CAGR from 2023 to 2030. This growth is fueled by rising disposable incomes, increased golf course development, global golf tourism, and the rising participation of women in the sport. Innovative product development by industry leaders is further driving market expansion. While the COVID-19 pandemic disrupted the market due to global lockdowns, the industry is recovering and is expected to see continued growth.
Following a notable boom in 2020, total golf participation in the US surpassed 40 million for the first time in 2022, highlighting the sport’s increasing popularity, according to NBC Sports Next. Several key trends are shaping the golf landscape in 2024. First, women are playing a pivotal role in driving golf’s popularity, with recent studies revealing that they constitute 49% of surveyed golfers. The National Golf Foundation reported a remarkable 15% increase in female golfers from 2020 to 2022, contrasting sharply with a mere 2% rise among male golfers during the same period.
Additionally, golf has transformed into a social experience, with nearly half of the surveyed golfers indicating they primarily play with friends. This shift emphasizes the communal aspect of the game, which can be leveraged by course managers to tailor marketing strategies and enhance engagement. Furthermore, there is a rising demand for golf lessons, with 36% of golfers reporting they took lessons in the past year, this figure jumps to 67% among GolfNow users, indicating a strong desire to improve skills regardless of competitive aspirations.
Golf stocks can be categorized under consumer cyclical stocks for several reasons. First and foremost, golf-related products and services, such as equipment, apparel, and memberships, are generally considered discretionary items. This means that consumers tend to spend more on these products when economic conditions are favorable. As a result, golf stocks exhibit characteristics typical of consumer cyclical stocks, which thrive during economic expansions and often suffer during downturns. Furthermore, the golf industry often reflects broader consumer trends. Increased participation in leisure activities like golf typically indicates a robust economy. Companies involved in the golf industry in one way or another are directly linked to consumer spending patterns in leisure and recreation, which are key aspects of the consumer cyclical sector. During economic downturns, consumers may prioritize essential spending over discretionary activities like golfing, leading to a decline in revenue for these companies.
On October 23, Jeff DeGraaf, Chairman and Head of Technical Research at Renaissance Macro, joined ‘Closing Bell’ on CNBC to discuss market seasonality and why he thinks it’s a good time for strong returns. He believes that seasonals have set up a nice cyclical trade from now through 2025. Jeff DeGraaf noted that while there is currently limited internal momentum, this should not be viewed negatively, rather, it could signify a consolidation phase.
He highlighted a unique market condition characterized by overbought conditions in both yields and the dollar, which are currently in a downtrend. Historically, when these conditions contract, it tends to be favorable for cyclical stocks. He emphasized that historically, the end of October marks one of the most bullish weeks for the market’s three-month forward returns. Given this confluence of factors, including overbought conditions and seasonal trends, DeGraaf believes there is potential for a cyclical trade to gain traction through the remainder of the year and into the first half of 2025.
Addressing concerns about yields and the dollar, he acknowledged that there is uncertainty surrounding their future movements, particularly with the upcoming elections. However, he maintained that his quantitative measures indicate negative trends for both yields and the dollar. DeGraaf suggested that while some investors may be recalibrating their expectations regarding these factors, the current overbought conditions are likely to subside as the market moves through the fourth quarter.
His overall insights suggest a cautiously optimistic outlook for cyclical stocks as they navigate current market conditions characterized by overbought indicators and seasonal trends. Golf stocks present a compelling investment opportunity as they align with the broader trends of consumer cyclical stocks, thriving during economic expansions. With increasing participation in leisure activities and projected growth in the golf industry, golf-related companies are well-positioned to benefit from rising consumer spending.
We sifted through ETFs, online rankings, and internet lists to compile a list of 15 golf stocks with high analysts’ upside potential. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close up of a golf course mower, showcasing the intricate precision of its components.
Average Upside Potential: 32.52%
Number of Hedge Fund Holders: 17
Topgolf Callaway Brands Corp. (NYSE:MODG) is a global sports equipment manufacturer specializing in golf products, including clubs, balls, and accessories like bags and gloves. It operates through 2 main segments: Topgolf, which offers technology-driven golf entertainment with interactive driving ranges and social spaces, and Golf Equipment, featuring renowned brands such as Callaway Golf, Odyssey, and OGIO. Committed to expanding its reach, it caters to golfers of all skill levels through innovative products and engaging experiences.
The Topgolf segment continues to be a significant growth driver, with Q2 2024 revenue up 5% and operating income increasing by 27.5%. This demonstrates the segment’s resilience and operational efficiency, even in the face of macroeconomic challenges. The company aims to expand this segment to 250 locations, driving future growth.
While the Callaway Golf segment experienced a decline in equipment sales, primarily due to last year’s successful Big Bertha launch, the brand’s strong reputation and the enduring demand for premium golf equipment suggest a recovery is on the horizon. It holds the top position in golf clubs and the second position in golf balls.
It’s making significant strides in its digital strategy, particularly for its Topgolf brand. The focus on digital business is evident in its increased digital sales penetration, which rose to 35% in Q2 2024. By investing in technology, talent, and data analytics, it aims to further enhance its digital capabilities and drive growth in the future.
The company presents a compelling investment opportunity, backed by its diverse portfolio of brands and strong financial performance. With a diverse portfolio spanning entertainment, sports, and lifestyle markets, Topgolf Callaway Brands Corp. (NYSE:MODG) is well-positioned for long-term growth. Despite short-term economic pressures, its strong fundamentals and strategic initiatives make it an attractive investment choice.
Polen U.S. Small Company Growth Strategy stated the following regarding Topgolf Callaway Brands Corp. (NYSE:MODG) in its fourth quarter 2023 investor letter:
“Topgolf Callaway Brands Corp. (NYSE:MODG) was created in 2021 with the merger of Callaway, a longstanding and slower-growing collection of high-quality golf brands, and Topgolf, an emerging sports and entertainment company. We spent over a year researching Topgolf Callaway as we sought to gain comfort with the level of earnings post-pandemic (golf popularity increased significantly and the Topgolf operating model. Importantly, we believe the Topgolf business model has significant room for growth both in units and in unit-level profitability. At the same time, the core Callaway brands provide ballast and cash flow to be reinvested to drive future growth. Beyond stores/units, Topgolf Callaway has invested in great brands and golf technology that we believe will create additional runways for growth. While the company is profitable, earnings have been under pressure over the past year. However, we believe they will reach an inflection point based on business mix and growth in Topgolf sometime in FY24, before growing at a consistent low-to-mid teens rate driven by store/unit expansion.”
Overall, MODG ranks 5th on our list of the 8 best golf stocks to invest in according to hedge funds. While we acknowledge the growth potential of MODG, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MODG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
