Casino stocks like Las Vegas Sands (LVS), Wynn Resorts (WYNN), MGM Mirage (MGM) and Melco Crown Entertainment (MPEL) are on fire thanks in part to a recovering economy and slightly better employment data.
Valuations are starting to get out of control, but can this run-up continue, or would you just be getting in at the tail end of a euphoria party?
Making a macro call against a rising stock market is something that has wrecked many good careers, but sometimes enough is enough.
Things are getting better in Las Vegas, and the bookings for 2010 are far ahead of where they were for 2009, but valuations of these casino stocks are as if the boom is back on. And these stocks cannot logically keep running higher forever, even if these companies beat earnings estimates over and over. This feels like one of those cases where the last of the momentum traders are chasing 52-week highs because 52-week highs are generally followed by higher highs.
Rational trading would indicate that this could be a blow-off top in the sector. Still, irrationality can last far longer than sanity if history is any judge.
The Safest Gamble on Casino Stocks
So, with these casino stocks, the “safest speculative bets” (yes, there is such a thing) are the near-month put options with the closest out-of-the-money strike prices. These will have the lowest premiums, and a deleveraged trade (one or two put contracts rather than shorting 100-200 shares) gives you a maximum downside that is more than tolerable, but still offers enough upside if these stocks take a nosedive.
Las Vegas Sands Corp. (LVS)
Las Vegas Sands Corp. (LVS) CEO Sheldon Adelson is back as one of the wealthiest men in America, and the stock was up more than 7% today and hit a new 52-week high of $24.66. It was trading at $21.30 Friday, and it closed out 2009 at $14.94.
This company was in DEEP trouble a year ago. Many wondered whether it would even survive without going into bankruptcy, and at the peak of the mayhem it was even given an auditor’s “going concern” flag for a short period of time. At the height of the selling craze in March 2009, this stock traded under $2 for more than two weeks.
The options trade here is the LVS April $22.50 Puts (LJJ 100417P00022500) currently around 23cents. These have traded more than 6,000 contracts versus a listed open interest of 8,959 contracts.
Wynn Resorts Ltd. (WYNN)
Wynn Resorts Ltd. (WYNN), which was at $77.40 Friday, hit a new 52-week high again today of $86.91 with shares up another 5%-plus. WYNN finished 2009 at $58.23, and the stock went under $20 (and even under $15 briefly) at the peak of the selling craze in March 2009.
Thomson Reuters has earnings estimates of 60 cents per share for 2010 and $1.03 per share for 2011. With shares around $86, that gives a 2010 to 2011 normalized earnings blended P/E ratio around 100. For 2011, that implied forward ratio is still above 80. In the new normal, that is high, even if Wynn has blowout earnings.
The short-term trade here is the WYNN April 80 Puts (UWY 100417P00080000) at 48 cents now. In fact, that contract traded almost 4,900 contracts today, which is higher than its open interest.
Melco Crown Entertainment Ltd. (MPEL)
Melco Crown Entertainment Ltd. (MPEL) is the pure play on the Macau gambling empire. Estimates from Thomson Reuters for revenues are $2.34 billion for 2010 and $2.5 billion for 2011, and the firm is expected to have a narrower loss each year with 2012 being the first breakout earnings year. The obvious notion is that a loss of only 2 cents per shares for 2011 is from a thin crowd of analysts, and it seems logical that the company will be in the black in 2011.
Of these casino stocks, MPEL is the only one not putting in new 52-week highs each day. That being said, there may be far fewer conviction bets in puts on this stock.
The MPEL April 5 Puts (NBQ 100417P00005000) only cost 5 cents. Keep in mind that while the stock closed around $5.50, it traded at $4.66 Friday.
MGM Mirage (MGM)
As for MGM Mirage (MGM), the stock was up more than 10% today, closing at $14.73, after it hit a 52-week high of $15.06 this morning.
The “safe speculative trade” here is the MGM April 14 Puts (MGM 100417P00014000), which are at 30 cents, and traded more than 20,000 contracts versus a prior open interest of 1,138 contracts.
So, if I were a betting man, which I am, I’d say this run in casino stocks can’t last forever. But do keep in mind that stocks and markets can remain irrational for far longer than most investors can remain solvent betting against them.
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