Has everyone forgotten the addiction of gambling?
*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses.
With casino stocks like MGM, Las Vegas Sands, Wynn, etc. falling a lot lower than the broad market, it's tempting as a value investor to scoop up these bargains and it's also tempting as an investor of these stocks to sell them at a loss, fearing that the stock price will never return to the levels it normally traded at.
It's understandable why anyone would be pessimistic on the gaming industry during these times. With the coronavirus spreading and the mandatory lockdowns states are issuing, who'd come to a casino anyway? How else would casinos generate money?
The Investment Case
Despite having to operate with a loss, many of these casino companies have balance sheets that can help them survive the lockdowns. Wynn Resorts Ltd. (NASDAQ: WYNN) has a current ratio of 1.44. MGM Resorts International (NYSE: MGM) has a current ratio of 1.26. Las Vegas Sands Corp. (NYSE: LVS) has a current ratio of 1.64. Caesars Entertainment Corp. (NASDAQ: CZR) has a current ratio of 1.26. These big casino companies, the companies that make up for the majority of the US casino industry, have ample liquidity to meet their short term obligations. They can survive the lockdowns if ever the lockdowns last for a couple months.
Also, from an investor's perspective, with many casino stocks trading at levels a lot lower than they've usually been trading at, there's a huge margin of safety. Most of the casino stocks I've analyze have fallen more than 40%, giving investors huge potential upside.
This time period, where the coronavirus is haunting the world, will be temporary. The share prices have priced in that moment. Once the lockdowns are lifted and the coronavirus has been dealt with, society will continue to function like normal, causing these casino stocks to once again trade at higher valuations.
And, there's one thing about the casino business that makes it special
That special something is that they can capitalize on people's addiction for gambling. Gambling is addicting. Humans like to play with chances. This is what makes the casino industry incredibly profitable (and incredibly cyclical).
Besides hotels, restaurants, resorts, and entertainment (especially for MGM), the gaming operations are where casinos make a lot of money. The slot machines, the poker tables, and the other games casinos provide to their customers are what makes casinos cash cows.
The casino industry is one industry that has a high barrier of entry. With all the licenses and regulations casinos have to operate under, it makes operating a casino even more difficult. But, once someone gets the license and gets the hang of how the business works, they'll start reaping in fortunes. The ones doing that that you can piggyback on are the big publicly-traded casino operators.
But there are other things to consider before buying the dip
With record unemployment happening within a short time due to the lockdowns and a dramatic reduction in business activity, once those lockdown orders are removed and society continues daily life like normal, predicting the rebound in activity for the casinos will be hard.
It's likely that the casino operators will recover slower than the rest of the market because people will start focusing more on the bills they've held off and on making up for the time they didn't spend at work. Because many Americans don't have enough cash in their savings, it's highly unlikely that many will first go to the casinos once the lockdowns are over. Instead, many will focus on strengthening their financial situation.
It's likely that the casino operators will recover slower than the rest of the market because people will start focusing more on the bills they've held off and on making up for the time they didn't spend at work. Because many Americans don't have enough cash in their savings, it's highly unlikely that many will first go to the casinos once the lockdowns are over. Instead, many will focus on strengthening their financial situation.
But, in the meantime...
That doesn't mean that it's an excuse for missing the opportunity to buy the dip. From my experience, once the stock market dips, there's a small window of time for investors to start accumulating assets at a cheaper price. No one knows when that window will close, but if I were you, do your research now and look into these stocks as soon as possible before they start going up.
If they go lower, then your opportunity to buy these assets at an attractive price just got extended temporarily.
Don't waste this opportunity.
Comments
Post a Comment