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It May Be Time To Place A Bet On Gambling Stocks

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It may be time to place a bet on gambling stocks. There is a lot of pent up demand to take risk and spend some money, with the world stuck at home for the past couple months. Legal gambling is the perfect place to satisfy that desire. Casinos are slowly but surely opening across the US but with all the proper precautions. People are driving extensive distances and waiting in long lines to risk it all at the blackjack table and feel alive again.

Casino's in Louisiana and Mississippi have just reopened and will represent an excellent case study for the reopening of larger gambling towns. Lines have been forming outside these recently opened casinos with gambling addicts waiting as long as it takes to get their fix.

The gambling capital of the US, Las Vegas, has not made any official announcement as to when they anticipate reopening, but casinos are taking reservations for as soon as June 1st. Casino operators are hoping that there is enough pent up demand to send their share prices soaring from their currently depressed prices.

Poor Results From Macau 

Macau, China (aka the Las Vegas of Asia), the largest gambling city in the world (more than doubling Vegas's annual revenue), has been open for some months now with less than desirable results. The low traffic can be attributed to the significant travel restrictions that were set on Macau.

Many US casino holdings rely heavily on Macau's operations such as MGM (MGM - Free Report) , Wynn Resorts (WYNN - Free Report) , and Las Vegas Sands (LVS - Free Report) with the latter two deriving most of their revenue from this region. Macau used to be a big moneymaker for these enterprises, and now they are weighing on their financials more than ever. According to Macau's sources, of all the open casinos, MGM appears to be getting the most traffic, but still marginal relative to its pre-COVID levels.

Once the travel restrictions are lifted for the Las Vegas of Asia, I suspect that Macau will once again be the international hotbed of entertainment it was before COVID.

What To Expect From A Vegas Reopening 

I predict that once Las Vegas opens it will be swarming with gambling fanatics who have just been waiting to pull that slot machine lever. The turnout in Louisiana and Mississippi's casinos gives me optimism about what kind of turnout we should expect in Vegas and Atlantic City. Considering that airlines are still fully operational within the US, I presume the cities will see crowds on opening day.

I like MGM right now with its healthy liquidity to get through the temporary downturn and the long-term potential from its diverse portfolio of operations across the US and Macau. MGM is down over 50% for the year, but I estimate a surge in capital gains for shareholders once the world economy starts reopening. Analysts are giving this stock an average price target of over $20 a share, a sizable upside from its $16.40 price today.

Eldorado Resorts (ERI - Free Report) is another one that I would consider with a small allocation as it opens 3 of its casinos in Louisiana. Eldorado is moving forward with its plan to acquire Caesar Entertainment (CZR) for $17.3 billion, which is anticipated to close in Q2. Both companies have enough liquidity to last for over a year. Though there are some definite short-term headwinds, I think the long-term outlook is healthy for the combined company.

Wynn Resorts has an excessive amount of exposure to Macau and has been punished harshly because of it. Wynn controls one of only six licenses for independent casinos in Macau, providing it with a wide moat in Asia's enormous entertainment center. The second half of 2020 is expected to see a resurgence of traffic in the region. The heavily discounted WYNN is set to boom once its high-margin luxury casinos start opening.

I would wait for a market pullback before I put on any positions in these highly volatile stocks, but MGM, ERI, and WYNN are the three that I am keeping my eye on.

Key Takeaways

Before investing in any of these gambling stocks, consider your investment horizon and risk tolerance. These stocks present a highly risky investment today and are only appropriate for long-term equity holders with a time horizon of more than 1-year. Casino stocks have runup significantly since their lows in March and may be subject to a pullback. I'm waitting to invest in these risk-on assets until the valuation stretched stock market takes another dip, which I am anticipating.

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