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Kentucky Derby Dark-Horse Theory: Can Value Investors Find a Favorable Bet?

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Though much riskier, looking for a dark horse is more fun than playing eeny-meeny-miny-moe on the same contenders everyone else is discussing.

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As I have discussed the last two years (see: Dark Horses, Long Shots, and Kentucky Derby Betting and The 2013 Kentucky Derby Dark Horse), much of the fun of the Kentucky Derby requires you to pick a horse, for fun or profit. In my opinion, the most fun and the most profit come from selecting a Dark Horse -- a horse about which relatively little is known.

The idea is that most of the horses in the Kentucky Derby are known quantities. In a typical field of 20 horses, 10 to 15 represent the most expensive colts bred from the most successful past winners. These horses are studied carefully from birth. They are trained by the most prominent trainers, and ridden by the most experienced and successful jockeys. They have been tested against other Derby-quality horses in major races. Odds on these horses are likely to be set close to fair value and after the track or bookie edge is subtracted; only an expert handicapper or someone with inside information can expect to get a favorable bet on one of these.

The remaining five to 10 horses can be a mixed bag. Some are colts with non-stellar ancestry and less-well-known trainers who had surprising success in Derby prep races. Some are horses with great success in second-tier races away from the big-time circuit. Finally there are horses with erratic performances; they have some spectacular attributes (such as great speed) and other problematic ones (like inability to break out of traffic).

Betting on all the more obscure horses is not a wise strategy. History suggests you'll lose on the order of 50% of your bet amount in the long run. That compares to an expected loss of maybe 5% or a little more betting on favorites, or near breakeven if you can find moderate-odds favorites or second favorites whose odds are declining immediately before the race. The dark-horse theory is that if you can winnow out the horses with almost no chance from the pool of obscure horses, the remaining dark horses could possibly offer favorable odds. Anyway, it's more fun than playing eeny-meeny-miny-moe on the same horses everyone else is discussing.

Starting last year, the Derby made it harder for dark-horse players by limiting the field of qualifying races. That means more of the horses in the Derby have to get there with good performances against other Derby contenders in recent races at longer distances. Nevertheless, 2014 is shaping up to be one of the most interesting dark-horse Derbys in recent memory.

For one thing, only seven of the likely Derby runners have traditional Derby resumes: Samraat, Ride on Curlin, Vicar's in Trouble, Intense Holiday, Tapiture, and Candy Boy (Uncle Sigh and Pablo Del Monte, who may or may not run, would also be in this category), and all of these are mild longshots likely to go off at odds around 15:1 to 25:1 (Uncle Sigh and Pablo Del Monte would likely be in the 50:1 to 100:1 range). While any of these horses could win the Derby, they are known quantities with strong arguments against their chances. A win from this group likely means an unexpected improvement in form or an unusual race.

California Chrome, the current favorite who seems to be developing into an overwhelming favorite, is not exactly a dark horse, but is awfully dark for a favorite. Unimpressive ancestry, an experienced but small and little-known trainer, non-rich owners, and no races outside of California is not the usual recipe for a Derby winner. It seems that everyone is looking for a reason not to bet on California Chrome, despite race performances that blow the competition away. If that sentiment grows, the favorite-longshot bias may operate strongly enough to make him a positive expectation choice.

Three horses are vying for the second-favorite slot: Wicked Strong, Hoppertunity, and Danza. As race day approaches and things sort out, one of them could go off at something like 4:1 and the other two between 6:1 and 12:1. None of the three was given much attention until recently. They were clearly qualified to run in the Derby, but they looked like longshots. Potential competition evaporated, in some cases by fading sentiment and in other cases by injury, and these horses started to get consideration by default. There isn't any reason to think any one of them can beat California Chrome, but there aren't good reasons why they can't either. That's what we like to see in a dark horse, and usually you have to move to longer odds to get it.

Four other horses are similar to the three above in history, but disappointing race performances have relegated them to longshot status, and not all of them may run. They are General a Rod, Bayern, We Miss Artie, and Dance With Fate. Five lesser-known horses that may run but seem highly unlikely to win are Medal Count, Commanding Curve, Ring Weekend, Vinceremos, and Harry's Holiday.

None of the above horses qualify as dark horses. I will forgive dark-horse bettors who take the rare opportunity to bet on a darkish favorite or second favorite, but only two potential Derby runners qualify for dark-horse purists: Wildcat Red and Chitu. Both horses have shown speed and endurance but not at the same times. The Derby is a longer race than all but one of the qualifying races, so runners are generally untested on that capability. It is usually a fast race, and given the 2014 runners, this year will probably not be an exception.

Despite showing Derby-winner qualities in flashes, neither horse has been impressive enough in races to attract serious betting attention; and neither had the pedigree or prominence to get in from the start. These horses could be as good as the second favorites (Wicked Strong, Hoppertunity, and Danza) or better, but pay off two to five times as much if they win. Anyway, if you're looking for a Derby horse to root for or bet on, I think your time will be better spent learning about these two than most of the rest of the field.

So get your bourbon and mint ready for the first Saturday in May and the most exciting two minutes in sports. Whether you make the trek to Louisville or watch on television, whether you have money or pride at stake, may your dark horse illuminate the field.
No positions in stocks mentioned.
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