Investors seeking out bargain buys in the midst of an increasingly volatile market this year, threatened by rising interest rates, global trade tensions, and geopolitical instability, should consider buying casino stocks, according to one team of analysts on the Street.
Market Has 'Overly Penalized' Casino Stock Valuation on China Negatively
In a note to clients on Thursday, Bernstein's Vitaly Umansky initiated coverage on four of the largest U.S. gambling companies, who have all sharply underperformed the broader market this year, as outlined by Barron's. Shares of Las Vegas Sands Corp. (LVS) and MGM Resorts International (MGM) have sunk 22.4% and 20.6% YTD, respectively. Meanwhile, shares of Wynn Resorts Ltd. (WYNN) and Ceaser's Entertainment Corp. (CZR) are down 36.9% and 34% respectively this year, through Friday afternoon.
While some of the downside can be attributed to company-specific headwinds, like allegations of sexual misconduct at Wynn, the Bernstein analyst noted that most of the negative sentiment has been driven by disappointing Macau gambling data. However, these cycles are typical for the gaming industry, he suggested, opening up an opportunity to profit for investors that get in at the right time.
“Over the last five years, gaming stocks have gone through periods of significant underperformance, followed by significant outperformance,” wrote Umansky. "The last six months have been exceptionally difficult for gaming stocks as Macau growth has begun to decelerate following nearly two years of strong growth and Las Vegas has seen unexpected near-term softness. However, the gaming space has shown, time and again, that if investors pick the right market, the right company, at the right time, outsized returns are possible.”
The Bernstein analyst is particularly upbeat on companies with Asian exposure, writing that fears of slower growth in Macau are overblown, and that "the market has overly penalized valuations on overall China negativity.”
Umansky started coverage on Wynn and Las Vegas Sands shares at outperform, writing that they are "too cheap to ignore." He expects the stocks to rise 56% and 21.7% respectively over 12 months from current levels. The Bernstein analyst initiated coverage on MGM and Ceaser's at market perform.
While maintaining his long-term bullish thesis intact, the analyst did acknowledge room for significant volatility ahead, given that casino stocks tend to move quickly on headlines and new pieces of data.