It was almost exactly one year ago when we last covered International Game Technology and Scientific Games. A lot has happened in a year. Both are down almost 50% year to date. If you’re an avid CalvinAyre reader then you shouldn’t be too surprised. Our coverage last January 23rd was entitled Game manufacturers: One to avoid, one to short. It was one of the relatively few times that specific trading advice was given in terms of exact strike price and time horizon:
If you have some spare change hanging around some 2020 puts on SGMS are a good gamble. See if you can hit the jackpot. The $25 strike is going for $2.85 a contract now, and none have been traded since December 4th. Nobody’s in this trade, surprisingly. Puts closer to the current price of $56 are much more expensive. Could Scientific Games fall below $25 by 2020? Sure it can.
Then at the end of the same article:
Buying a few puts on SGMS, even more indebted than IGT mind you, for 2019 or 2020 and leaving them be for a year is relatively safe assuming you can afford to lose most of what you put in and it won’t give you heart palpitations. Stick to small positions and it will be easier to hold on to if the top is still ahead of us.
As it happens, January 23rd was a top, but not the top. Shares fell 30% from last January, triple bottomed, and rocketed higher to a new top on May 21st, about the same time that Macau topped. Then the real collapse began. We are now at $24.37, still in the money, and the price of January 2020 puts on SGMS is now $9.60, for gains of 237%. This is taking into account the recent 65% surge from lows since mid December. It’s impossible to pick the exact low, but had you done so by chance, those puts were then worth $19.50 taking into account intrinsic value at the lows of $14.79 plus remaining time value, for gains of nearly 600%. If you still own them, just cover. If you keep them hoping to find the lows again you risk losing most of your gains by summer, and even if we see the lows again by fall or winter it’ll be very hard emotionally to hold on until expiration.
The current rally in game manufacturers and stocks generally could continue for a few more months, so for risk-oriented traders, it’s time to flip the trade on game manufacturers and go long, again with small positions you can afford to lose on without freaking out, hiding from your wife or postponing your retirement. The better choice here to go long is IGT rather than Scientific Games because it has slightly better finances, and the fact that it fell almost exactly in tandem with Scientific Games even though it has better fundamentals indicates that hedge funds are trading the two together by sector allocation rather than examining companies individually. The advantage of this is that on the way back up (assuming there is one), then at the worst the two stocks will match momentum again. I don’t think it will happen this way because Scientific Games’ balance sheet has markedly deteriorated over the last year. With the collapse in its share price it is now levered close to 400%, and half of its debt is not hedged. It’s been losing money consistently for years and pays no dividend. But who knows.
IGT isn’t doing much better with interest expense also hacking into operating profits. But it least it actually makes money most of the time. Leverage is only 250%, which is pretty bad but not catastrophic. IGT is basically treading water, eking out small to decent profits most quarters but in terms of long term growth prospects they’d have to be huge in order to put their finances back on sure footing for the long term. With much of their business tied to Italy I don’t see that happening. A jump from here though in the stock short term is still quite possible in the next few months because monetary policy is loosening back up and momentum traders will pick up on technicals as well. There is strong long term support for IGT in the $12.50 to $14.50 range, so downside is relatively limited. Even if the stock hasn’t bottomed yet, there is a nice dividend of 5% at these price levels which should help insulate against further loss somewhat.
Looking at the monetary charts from the Federal Resereve and taking into account the central bank’s signaling yesterday that the rate hiking cycle is pretty much over, it appears we are in the final phases of inflating asset prices until the global debt chickens come home to roost. Dollar supply growth has been very strong since December, but that’s a double-edged sword because it preps the May seasonal downturn to be even more extreme than usual. So I’d say we have around May to June for the rally to exhaust itself. I don’t see IGT going back up to recent highs over $30, but a decent target to exit the trade should be in the $23-$25 range for a 40% gain or so plus 1.25% in dividends.