Macau reopens to little fanfare, more coronavirus infections, prices are climbing in the United States while momentum stocks ignore all bad news and just keep surging. This week in gaming markets, let’s begin with the Outback.
Crown reported earnings this week and they were disappointing. 28% decline in profit due to significant VIP decline. This probably has something to do with the massive bushfires that scared away foreign gamblers from the high rolling tables. This is not a structural issue, at least it doesn’t look that way. Crown is a relatively safe income play, or a dividend reinvestment move at over 5% yield and trading at the bottom of a 5-year range. It’s not exciting but it’s not too dangerous either.
Crown is being accused of corruption. It might be true but it doesn’t matter all that much. If there is corruption, it’s in cahoots with the Australian government or their bureaucrats. Crown is being accused, for example, of arranging for the fast-tracking of foreign visas. Crown is a gambling company. They don’t fast-track visas. They ask for it. The government is the one that does it. There’s nothing to see here, and if there is it will eventually be forgotten.
Australia is protected from Covid-19 infection because of its hot, dry climate. Crown should stay stable around its long term trading range, as should Tabcorp. Both are relatively safe for a gaming portfolio long term, and pay nice consistent dividends.
News of anemic lines at the entrances to casinos as they slowly reopen are gloomy and don’t make investors feel so nice, but this should be expected. Macau wasn’t going to reopen like Mardi Gras or anything in the midst of an ongoing outbreak. Phased reopening of casinos will continue. Hold on to positions but don’t add at this point. We may have a second round of Covid-19 outbreak news that could generate another wave of selling.
There are now clusters of infection in Beijing, and if there is another outbreak there, Macau will sell off again and Macau might even close entirely a second time. Macau stocks really haven’t been beaten up noticeably from Covid-19 any more than any other minor selloff, which suggests that if there is a setback in containing the virus, the selloff could be quite hard. Again, total Macau positions should not exceed 5%.
You wouldn’t even be able to tell Macau completely shut down judging from long term charts of Galaxy, LVS, Wynn, or Melco. Still, I expect a rebound once the weather warms up, around March. Seasonality most likely will affect the spread of the virus. See this article from Fortune for reference. We’ll check back during the first week of March and reassess. If the virus is still not under control by then, there may be a bigger problem. We’ll cross that bridge when we get there.
Macau earnings numbers are going to be horrific come April and May but everyone knows this. I expect a brief bump after those bad numbers are reported as the headlines will be along the lines of “this wasn’t as bad as we feared”. That would be the time to close out the coronavirus trade.
Stay out of the U.S. stock market. Momentum stocks are still climbing, which is almost embarrassing at this point. Penn is up another 3.5% since last week. Eldorado another 3%. Boyd 5.3%. Boyd earnings buoyed by spendthrift ways doesn’t sound like great news long term. Meanwhile, this headline from CNBC should scare the pajamas off investors, if they had the habit of wearing pajamas while investing. 33% of Americans can’t make it from paycheck to paycheck, even 6-figure salary earners. Then why are regional casinos doing so well? Can’t last.
Zooming out to the bigger picture in the U.S., gold is climbing significantly again, and tends to lead commodities generally by a few months. That means higher prices are on the way, and consumers will struggle even harder as prices rise. Gold bottomed in November 2015 and commodities generally in February 2016. Gold rallied out of the 2008 financial crisis by October 2008, commodities generally 5 months later. Plus, commodities prices are going to start to move much higher soon anyway as Chinese supply chains are still shut down. Gold may be sniffing this out. None of this is good for U.S. domestic casinos or manufacturers like IGT and Scientific Games which rely on the casinos.
Long term hold companies William Hill and Rank did well this week. William Hill is up 7.4%, regaining most of its losses from a selloff on February 12. Rank keeps climbing higher, up 3.1%. The rally has gone on long enough and I expect a pullback soon. Take more profits on Rank and move more over to 888, which continues to struggle near 52-week lows.
My feeling on the increasing stranglehold of regulation on U.K. gaming is not great. Boris Johnson’s move to increase spending to try and pacify the British electorate means he will likely look for scapegoats to mollify the opposition if he needs to. I warned this administration would not be friendly to gaming, though it would not be as openly hostile as a Labour government would have been. Johnson will still use gambling as a punching bag when the people start complaining and Johnson needs a fall guy. The bookies to be hurt most by this will be the leveraged ones.
Betsson is up another 13.7% this week. It’s looking more and more likely that the bottom is in. The stock is now up better than 37% since the original buy call here on February 7. A short profit-taking pullback is possible here but don’t worry about waiting for it. If it happens just add to positions. You’re still getting close to a 7% dividend at these prices so timing a perfect entry will just fray your emotions. If you don’t want to specifically buy into strength on Betsson, NetEnt is also a great buy at these levels and looking like it has a firm bottom in at the low 20’s.
Zooming out on Sweden, the country continues to look like a relatively safe place to park money. There is no public debt problem there. There is an interest rate problem, but since the debt is relatively low that means less people there are reliant on government checks. There are problems, but it’s a much stronger jurisdiction than China or the U.S. or the EU at this point.