What happened
Shares of sports-betting name DraftKings (DKNG 4.92%) ended Wednesday's trading session lower by 6%, seemingly in response to the sudden swell of class action lawsuits being prepared by shareholders. A more thorough look, however, suggests this weakness has been brewing -- and gaining traction -- for some time now.
So what
No particular headline upended DraftKings shares today, although it's difficult to not notice the sheer number of class action suits that have been advertised in just the past couple of days. Attorneys are calling on shareholders that have suffered losses to participate in the legal effort claiming the company knowingly and willfully facilitated illegal gambling options in the past.
Image source: Getty Images.
Be wary of connecting these dots, though. Lawsuits from frustrated shareholders typically don't get much traction.
The more plausible explanation behind Wednesday's weakness is that it's a simple extension of the selling that's been underway since the stock peaked in March. For a short while it looked like May's deep low and rebound effort would break the stock out of its bearish rut. The bears took hold again in early June, however, in response to a warning from Hindenburg Research that the company's questionable roots could cause future problems. Fair assessment or not, it's taking a toll.
Now what
The lack of legitimate news is somewhat the point. This isn't a name that's been trading on the probable prospects of a growing legalized-gambling market, but instead is a name being pushed around based on perceptions and sentiment. The premise of DraftKings' business model was loved by investors late last year and early this year, nearly quadrupling the price of its stock in just 12 months. Nothing's really buoyed shares since late March, though, as the entire theme has lost its luster and allowed DraftKings stock to fall nearly 40% from that month's high. Today's tumble is simply more of the same.
Take the hint. Investors may want to steer clear of this stock until the sentiment-driven selling has run its course. There's no telling when and where that might happen, but it's apt to end in fireworks.
