U.S. casino operators' significant investment in Macau – a special administrative region in southern China – makes the trade war between the United States and China a high-stakes game, as tariffs imposed by both countries have the potential to drastically slow global economic growth, which in turn reduces business and pleasure travel demand.
Casino stocks with Macau investments have reflected investors' nervousness over the past month. The exchange-traded fund (ETF) that best tracks the performance of casinos, the VanEck Vectors Gaming ETF (BJK), is trading down 6.56% compared to a fall of just 1.06% for the broad-based S&P 500 Index over the same period.
Amid the recent trade tariff escalation, JPMorgan Chase analyst Joseph Greff believes that the sector's "in line to uninspiring" quarters likely met investors' low expectations and that stock valuations already reflect the threat to earnings. "In these cases, companies with favorable growth outlooks, attractive free cash flow generation and stable fundamentals can get overlooked," Greff told Barron's.
Swing traders who want to bet that casino stocks have the fallout from trade threats mostly factored into their price may want to roll the dice on these three key industry players.
Wynn Resorts, Limited (WYNN)
Founded in 2002 by real estate billionaire Steve Wynn, Wynn Resorts, Limited (WYNN) operates luxury casinos and resorts. Its four flagship resorts include Wynn Macau and Encore in Macau and Wynn Las Vegas and Encore in Las Vegas. The company generates roughly 80% of its revenue from Macau. Greff sees Wynn as the value stock pick in the industry with the opening of Encore Boston Harbor this summer and the transformation of the company's Macau resorts into mass-market entertainment meccas. As of May 17, 2019, Wynn stock has a market capitalization of $13.7 billion and pays out a 2.08% dividend yield. Despite the share price gaining nearly 30% on the year, it has dropped 12% over the past month as trade war fears resurface.
Wynn shares have oscillated within an orderly ascending channel since early December last year. The price has fallen toward the pattern's lower trendline and 200-day simple moving average (SMA) in recent weeks, which provides an entry point at a crucial support level for swing traders. Those who take a long position should set a profit target near the channel's upper trendline and manage risk by placing a stop-loss order beneath this month's low at $124.80.
Las Vegas Sands Corp. (LVS)
With a market value of $49 billion, Las Vegas Sands Corp. (LVS) is the world's largest operator of fully integrated resorts. The company, which generates a whopping 90% of its revenue from Asia, owns and manages casinos, hotels and convention centers. Some of the entertainment giant's well-known resorts include the Venetian Macao and Sands Macao in Macau and the Venetian and Palazzo in Las Vegas. The resort operator topped the Street's top- and bottom-line first quarter expectations, aided by increased revenues at its casinos, rooms, shopping and dining precincts. Las Vegas Sands stock issues an attractive 4.59% dividend yield and is up 23.29% year to date (YTD), but it has dipped almost 7% over the past month as of May 17, 2019.
Like Wynn, the Las Vegas Sands share price has traded within an ascending channel since late last year. A bullish signal occurred in early April when the 50-day SMA crossed above the 200-day SMA in what technical analysts refer to as a "golden cross" – indicating the emergence of a new uptrend. More recently, the price has pulled back to the channel's lower trendline, which offers a high-probability trading opportunity. Traders should look to book profits in the vicinity of the pattern's upper trendline. Manage risk by placing a stop under the May 13 low at $61.36 and moving it to the breakeven point if the price exceeds the April swing high at $69.60.
MGM Resorts International (MGM)
MGM Resorts International (MGM) operates integrated casinos, hotels and entertainment resorts in the United States and Macau. The company, which takes the crown for having the most guest rooms and suites on the Las Vegas strip with 35,000, owns popular resorts, including Bellagio, MGM Grand, Mandalay Bay, Mirage, Luxor and New York-New York.
The casino titan isn't as exposed to the ongoing trade war as much as Wynn and Las Vegas Sands, with only about 20% of its revenue coming from Macau. Greff suggests that event-driven investors take a closer look at MGM given the value it creates from real estate monetization and its planned cost-cutting strategy for 2020, which he believes the share price hasn't factored in. Trading at $26.53 with a $14.25 billion market cap and offering a 1.95% dividend yield, the stock has returned 9.89% YTD, underperforming the resorts and casinos industry average by 11.57% as of May 17, 2019.
A loosely constructed inverse head and shoulders pattern stands out on the MGM chart. The stock retraced to the pattern's right shoulder earlier this month and has rallied from that level, suggesting that this may be a significant support area. The relative strength index (RSI) gives a reading well below the overbought threshold, which provides the price with plenty of room to make a run toward the early February swing high around $30. Cut losses quickly if the price fails to hold March and May lows at the $25 level.