After more than two years of falling revenues, Macau’s gaming industry may have finally found its footing. Although casinos are still a tough business — thanks to China’s crackdown on corruption — some experts predict a return to growth in 2017. That’s much needed news for Macau, where revenue from casinos accounts for half of its gross domestic product. Better yet, domestic casino stocks have also experienced a recent resurgence.
However, should investors double down, or cash out while they still can?
To say casinos are a daunting task is a major understatement. The sector has been plagued by high-profile failures, one of which was last year’s bankruptcy of Caesars Entertainment Corp (NASDAQ:CZR). And despite following through on the required restructuring plan, Caesars continues to be a money pit. An even worse situation has been Atlantic City, where multiple casinos were forced to shutter due to a halving of income. On top of that, thousands of jobs were lost, further exacerbating an already impossible challenge.
But amid the firestorm, bullish investors of casino stocks do have genuine reasons for hope. Primarily, the financial markets have been quite favorable to the sector. The only exchange-traded fund for casinos, Market Vectors Gaming (ETF) (NYSEARCA:BJK), is up 7% year-to-date. So far, that’s better than what the record-breaking benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has done. In addition, the BJK has a tendency of coming back strongly from bearish years. As a confirming sign, several individual casino stocks have seen sharp gains in 2016.
Ultimately, the decision whether to take a gamble on casinos may come down to the cynicism of the vice industry. Through good times and bad times, the best-managed casinos will always come out on top. That’s because they’ve got the manipulation of human emotions down to a science. From psychedelic carpets to richly oxygenated rooms, casinos have every angle covered.
Here are three casino stocks that have a solid chance of moving higher for the rest of the year.
Casino Stocks to Buy to Double Down on Casinos: MGM Resorts International (MGM)
MGM Resorts International (NYSE:MGM) is on a mission to regain lost time.
After losing 4% of market value between the beginning of 2014 and the end of 2015, MGM shareholders are understandably antsy. It wasn’t too long ago that MGM stock nearly doubled its price in 2013, beating out some well-known names among Las Vegas casinos. Can the resort pull out a positive surprise with earnings looming?
One of the tough challenges of analyzing quarterly performances for casino stocks is that they tend to be an all-or-nothing affair. MGM is no exception. In fiscal year 2015, positive earnings surprises averaged 142%. But in the fourth quarter, earnings per share sank down 6 cents against a consensus target of 8 cents. This time around for Q2, analysts are expecting MGM to hit 24 cents, which is on the higher-end of the spectrum.
Admittedly, it will be quite the hurdle for MGM to meet, let alone exceed the consensus. Last year’s Q2 forecast called for only 11 cents. However, MGM had relatively strong sales in June, and led competing casinos in market share. In addition, Wall Street is expecting a surge in revenue for the company next year. That helps to explain why more and more people are buying into MGM stock ahead of the newsreel.
Despite being in a battered industry, MGM Resorts is still putting up a fight — and that could turn out to be great news for those willing to take the plunge.
Casino Stocks to Buy to Double Down on Casinos: Melco Crown Entertainment Ltd (ADR) (MPEL)
If there are any casino stocks that desperately need a reversal of fortune, Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) would be near the top of a long list.
Over the last two-and-a-half years, MPEL stock has lost over 62% of value in the markets. Blame, of course, falls on the company’s principle area of business, which covers Macau and the Philippines. For Macau in particular, anti-corruption initiatives by the Chinese government have scared off high net worth clientele.
The big ballers aren’t the only ones that have headed for the exits. The last time MPEL beat earnings expectations was in Q1 FY2014, with a fairly soft surprise — relative to competing casinos — of 10.5%. Otherwise, it has mostly been a string of bad misses, causing investors to dump out en masse. But because of the prolonged carnage, Q2 FY2016’s consensus target is a lowly 6 cents. That gives MPEL a chance, especially as their sales are showing signs of improvement.
In turn, derivatives traders are really keying in on MPEL stock. A significant amount of bullish call options have been purchased recently. Overall options volume has been increasing, and there were 177 calls for every one bearish put at the beginning of the week.
Although it’s one of the more risky investments among casinos, if it works, MPEL could win big.
Casino Stocks to Buy to Double Down on Casinos: Boyd Gaming Corporation (BYD)
Boyd Gaming Corporation (NYSE:BYD) is unique among casino stocks in that it was one of the few names that escaped the sector meltdown of the last three years.
Since the beginning of 2015, BYD shares have generally traced a bullish trend channel. That being said, BYD has also had a rough start to 2016. As a result, the company is down about 0.1% year-to-date. The question is, which side of the coin will BYD fall on moving forward?
Should casinos continue to ride recent momentum, it would be tough to bet against BYD. Over the last five quarters, the company put together a string of impressive earnings beats averaging 70%. Of course, with success comes a higher expectation. Even with that added pressure, BYD has a fighting chance. Management has spent considerable efforts on controlling costs, thereby improving their margins. Also, their free cash flow has been much more stable in recent years.
All this has translated into favorable trading patterns. Since July 25, BYD stock is up over 4%. The price increase occurred over unusually high volume. Technical analysts often look to volume trends to confirm whether a rally has the legs to keep moving higher.
It may be the lesser known among the featured casinos, but BYD has plenty of strengths that shouldn’t be ignored.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.