by Lawrence Meyers | March 21, 2013 7:00 am
If you’re going to invest in Las Vegas, then you should invest with Wynn Resorts (NASDAQ:WYNN). You get both the Vegas operation, and the entire Macau operation along with it.
But does Wynn hit the mark as a retirement investment?
I don’t always have first-hand experience with the products of companies I write about, but I have stayed at both Wynn and Encore. I love them both. Their understated elegance attracts a wide demographic, from older folks to average tourists to the most beautiful 20-somethings I’ve seen outside Hollywood (and that’s saying something). The staff and service are outstanding.
Best of all — at least for investors — everything is expensive. While other resorts struggle to remain relevant, Stephen Wynn is always thinking ahead, renovating his rooms every five years, and nobody else has the pulse of Vegas like he does. He’s a master strategist. He knew not to over-leverage when he built Wynn, and that’s why it isn’t crushed under debt like MGM Resorts (NYSE:MGM) is.
Furthermore, over the long haul, gambling always favors the house, and in a very big way. People always come back to roulette, even though it’s one of the worst games you can play, odds-wise.
Alas, resorts and gaming are both subject to the state of the economy. On the resort side, investors need to remember that casinos are hotels first. When the economy is expanding, even a little bit as it is now, hotels do well, but they perform poorly when the economy contracts.
At the same time, you can never predict gaming revenue. Sure, you can peg a certain range based on the house edge and historical results. However, you can never predict the occasional wacky quarter, like the recent quarter when Wynn’s house won far above the odds in baccarat.
You might be able to estimate revenue and growth quarter to quarter. But over the very long term, trying to establish a firm growth rate — and therefore a PEG ratio or other valuation metric — will be challenging.
So, even though Wynn is a first-class operation, with a solid balance sheet, strong cash flow and a 3.3% yield, I’m not comfortable adding it to my retirement portfolio. I don’t like relying on cyclical stocks for retirement. I want businesses that will do well in any environment.
Wynn, however, is a great trading stock; it tends to move in a wide range over many months. Although the best time to get in would have been back when it was at $100, there’s room for upside here at $120, based on previous trading history.
With respect to options, because Wynn is solid financially, it makes it a candidate for a particular strategy: Buy the underlying stock and repeatedly sell covered calls against it. It’s a high-priced stock that tends to be volatile, so that sets it up for generous premiums.
If Wynn should spin into a REIT, like Las Vegas Sands (NYSE:LVS), then it might be worth revisiting, particularly if that dividend yield is bumped up.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities
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