In the wake of last year’s spectacular performance by most casino stocks, the sector’s bulls are running like they’re in Pamplona, while casino bears are cautiously pacing the sidelines. Who’s right? Well, that depends on timing — and trends.
Last year’s biggest winners were casino stocks that had strong exposure to Macau. The former Portuguese colony, which is administered by the People’s Republic of China, has run wild in the past three years — and casino stocks with high-end properties in Macau have raked in revenue hand over fist. Indeed, Macau’s Statistics and Census Bureau on Monday reported that the economy rose by nearly 12% in 2013 — driven in large part by a 18.6% rise in gaming.
While that growth rate is a far cry from the 35% delivered back in 2011, it is more sustainable — an important consideration for investors. Macau is expected to surpass $40 billion in gross gaming revenue in 2014, according to independent research firm Spectrum Gaming Group.
Spectrum identified several trends that could have a profound impact for casino stocks in 2014 — two of which make sense to highlight here: First, gaming has expanded dramatically in the U.S. in the past 10 years, resulting in market saturation in many regions of the country. The heat is on U.S. casino operators to grow their business organically since there are fewer opportunities to simply lure business from neighboring states.
Second, market saturation fears in the U.S. will likely spook lenders, who may tighten underwriting standards for casino companies that already are highly leveraged. Given that insight on the gaming sector, here are two casino stocks to hold and two to fold: