Kentucky Derby: The horses swinging for home runs

(CNN)Home runs exist beyond the realm of sluggers in Major League Baseball -- a few racehorses hit them too.

The metaphor is used so often to describe the boom or bust nature of investing in thoroughbreds that the baseball term has reached the racecourse.
Hitting home runs when buying into horses is a lot like buying penny stocks, shareholders aim to reap multiple rewards for their initial capital, or face the reality that their investment is a dud.
Carpe Diem, the third favorite for Saturday's Kentucky Derby at Churchill Downs, is one horse with a home run habit.
    Purchased one year ago for $1.6 million by co-owners WinStar Farm and Stonestreet Stables, the colt has already produced a staggering 400% return on paper for his investors.
    A pair of wins in prestigious Grade I races shot his market value up to $8 million -- and there could be more to come.
    Should Carpe Diem win the "Run for the Roses" on Saturday, Elliot Walden, president of racing operations at WinStar, estimates he could be worth as much as $15 to $20 million.
    "It's hard to say this when you are spending $1.6 million for (a horse) but basically they are business decisions," he said of WinStar's purchasing strategy.
    "It's not like you would expect a return on an investment where you can materialize four, five or eight percent. It's either going to be a home run or a failure."
    Carpe Diem, to be ridden by John Velazquez in the Derby, is, in a way, more of a solid investment.
    He was purchased for a premium from a pinhooker -- a trader in young horses aiming for a profit -- because of his famous pedigree. The three-year-old was sired from famous race winner Giant's Causeway and Rebridled Dream.
    Depending on his performance on track, a stallion from a regal bloodline can fetch in stud between $5,000 to $100,000 per mare 100 times a year for up to 20 years. The annuity can eventually mitigate -- and sometimes far surpass -- the upfront costs of a thoroughbred.
    But Carpe Diem's owners are also running a dark horse in the Kentucky Derby, thanks to the persuasive powers of Jerry Brown, president of Thoro-Graph, a performance tracker and consultant to racehorse investors.
    Brown successfully convinced Walden to invest a minority stake in Upstart, a thoroughbred with a relatively modest bloodline who is an outsider going into the famous race at Churchill Downs.
    For an entire year Brown has been tracking what he considered to be impressive finishes by the colt, even though he wasn't always winning.
    "This horse is not only really good, but really concealed," said Brown, "which is where I come in."
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    By combing through scores of Thoro-Graph charts, Brown noticed a pattern that could pay dividends.
    Although the colt won just three of his seven races, he consistently lost to other horses having the race of their lives, given their subsequent finishes.
    "I'm not look for a good pedigree or bad pedigree, I'm looking for characteristics which I can project out what data I have already," he said.
    To Brown, the numbers simply don't lie.
    According to his figures, most thoroughbreds regress statistically after running impressive campaigns, but Upstart was different. Crucially, the colt improved his Thoro-Graph scores in impressive back-to-back races, showing an ability to progress.
    What may have also repelled other buyers was a sinus infection Upstart sustained after his last race. It caused him to take a series of antibiotics, raising doubts about his recovery, according to Brown.
    Nevertheless, after reviewing Brown's data and conducting his own due diligence, Walden took a leap of faith by purchasing an undisclosed minority stake in Upstart from veteran owner Ralph Evans.
    "Anytime you get in like we did right before the Derby, you're taking a punt," Walden said, before expanding on his decision.
    "When you analyze the data, it only points to Upstart being as fast as the other horses, it's just that some of it has been circumstantial."
    Thoro-Graph is known for its "speed figures," assigning a rating to every horse in every race in North America. There are a range of factors that go into ratings, including the weight of the jockey, the distance covered around the turns, the speed of the track, and the headwind.
    The data is sold online for a starting price of $25 each race day.
    "My job is to find things that the public can't see," says Brown, "and to get those horses before everyone else figures out how good they are."
    Slice of the action
    Though selling charts sustains most of Brown's revenue, consulting for big time racehorse owners is what sets him alight.
    Brown's wealthy clients tend to be self made and open to new ideas. In the 1990's he attracted notice by consulting for Woody Allen's producer Bob Greenhut as well the Preston brothers, oil barons from Texas who founded WinStar's predecessor, Prestonwood Farm.
    Eventually clients like Ro Parra, a former senior executive at Dell who started Millennium Farms, began flocking his way.
    Brown says he has been responsible for the purchase of 87 horses that have gone on to win stake races, which is fortunate because he gets a cut of the action.
    Along with charging a consultancy fee (the industry standard is 5% of the purchase price,) Brown also receives a slice of a horse's winnings, though he declined to say exactly how much.
    As far as Brown is concerned, providing any return on investment should be welcomed by the majority of racehorse owners.
    "Most people are in this game because they have fun, and a lot of people can't afford to buy a sports franchise," he said. "And this way they can have their own franchise in a fairly major sport and have fun doing it."
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    While baseball and soccer teams truly embraced statistical analysis in the new millennium, horse racing could be considered the original "Moneyball" sport. Brown's former mentor Len Ragozin launched his racing numbers guide, The Sheets (a.k.a. "The Rags,") back in the 1950s, and Andrew Beyer published the first of his series of handicapping books, "Picking Winners," in 1975.
    Meanwhile, active participants like Ahmed Zayat, owner of three Kentucky Derby entrants including the favorite American Pharoah, are developing their own set of data driven criteria to lower purchasing risks.
    "If you sell a horse for $10 or $12 or $15 million, he carries a whole (stable's costs) for a year," Zayat said, explaining the economics behind most racing operations. "You need to have one star. One horse can make up for all the mistakes -- the home runs, we call them."
    So despite all the number crunching, the consensus is clear: horse racing is still very much a game of boom or bust.
    "That one winner (at the Kentucky Derby) is going to go up immensely," said Walden, with fingers firmly crossed on the fate of Carpe Diem and Upstart. "But there are 19 other horses. Probably two or three of them might hold their value, and then horses five to 20 are going to be devalued pretty significantly from what they were worth the week before."
    Brown reiterates the point. Investing in race horses is not for the faint of heart, but having a thoroughbred who can swing for the fences helps.
    "The median result is going to be a loss," he said, "but when you hit a home run in this game you can really do well."