With the NFL season about to kick off, Las Vegas sportsbooks are about to get a nice revenue bump. Just like the situation with the English Premier League in the UK though, trades or long term positions should not be made based solely on seasonal trends that the entire market is already aware of. If we may hark back to a 1995 episode of The Simpsons when Homer invests in pumpkins in October and singes a one dollar bill to light a cheap cigar in celebration of his notional gains, markets don’t really work that way. The question really is whether the bump that sportsbooks will get due to the NFL season will be more or less than what the market expects.
My hunch is that it will be more, and here’s why. Though some Las Vegas firms have shown some tentative signs of weakness, particularly MGM in its last quarterly report on shrinking volumes, it is likely that this is only a temporary downturn due to seasonally shrinking dollar supply growth that generally happens around July and August, as those who read CalvinAyre are well aware of by now. That downturn is now over and done with, and the quarterly trough this year was about 3 times higher than the quarterly trough last year, which ended up causing the August 24th, 2015 market crash. There is very little chance of that happening now, barring some kind of political or natural disaster in the US like an Earthquake in Las Vegas or something, or a financial disaster in Europe that could come at any time. Assuming none of that will happen until after this year’s Super Bowl, we have a green light to go back in to Las Vegas stocks, particularly ones with sportsbook revenues.
The NFL season is fortuitously blessed to be in synch with seasonal money supply expansion trends. It starts in September and ends in early February, precisely when dollars are multiplying at their fastest seasonal rate. This year, given that the trough in dollar supply expansion was much higher than in 2015, we have a considerable head start to this year’s trek back up. We could even get to double digit expansion by January in the thick of the playoffs, which would really fuel stock prices much higher. People will have more money in their pockets that they will use to bet on games, among other things. The US remains at full employment and will probably stay there by the end of the NFL season, consumer spending keeps going higher, and “everything is awesome” for now, as they say. It won’t be awesome perpetually, but for now it is.
Buy at a high?
Yes, stocks are very expensive now and the S&P is at all time highs, so is going long here dangerous? Not really, at least not for gaming stocks. First of all, mainstream financial news blabberers can’t go five seconds without mentioning stocks are at highs. This means the peanut gallery is busy laying bricks in the Wall of Worry. And as some analysts like to say, this is a market of stocks, not a stock market.
If we take MGM, Las Vegas Sands, and Red Rock Resorts for example, all of whom have top-notch Las Vegas sportsbook resorts, such a single broad stroke analysis does not apply to them. MGM is still 76% below its October 2007 high of (!) $100.50. Most investors treat high that as a completely different epoch that occurred in a different quadrant of the galaxy somewhere in Insanityland, but it was only 9 years ago, on this very planet. LVS is still 65% below its own 2007 high of (take a breath) $145.57. Red Rock Resorts is a reincarnation of Stations, which already went bankrupt and only has a P/E of 10 or so. So no, these three particular stocks are not expensive by recent historical standards, even with the broader market at historical highs. The bubble forces are fueling completely different sectors now. The gaming sector is not involved this time.
Of the three, I believe weight should be focused on Red Rock first, MGM second, and leave LVS alone, or at most a 1% position. We already made a nice profit on LVS, and with LVS there is the serious tail risk of Trump getting elected (maybe we ARE on a different planet from 9 years ago?), going to war with China and LVS crashing. It’s not worth the risk of a larger position. With MGM we also made a nice profit in the model portfolio but declining volumes are slightly worrying. It has, however declined 3.6% since we sold our 5% position, so taking a small stake here for the NFL season is OK.
A look at Red Rock’s finances reveals a mediocre picture, nothing to worry about imminently. Leverage is at nearly 100% but $1.1 billion of its $1.85 billion in variable rate debt is protected with swaps, and most of its debt is due after 2021. Eventually this will probably bankrupt Red Rock yet again, but for now the situation is fine. Plus, the Fertittas own 22.8 million shares, which is a vote of confidence, but as many know, the Fertittas have made serious mistakes in the past.
So, as the National Football League kicks off, a 5% position in RRR and a 3% position back into MGM is probably a good move, and will be added to the model portfolio. If we could zero in on specifically sportsbook revenue for these companies it would sharpen the picture a bit. Unfortunately they all group sportsbook together with their respective Casino segments, so it’s hard to tell which is a purer sportsbook play. Both should do well through January in any case.
