Activist Hedge Fund Starboard Value is Looking at MGM

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This morning I am recommending a bullish trade on MGM Resorts International (NYSE:MGM), the holding company that owns and operates domestic and international resorts and casinos.

MGM started to recover at the end of December, and now it is between its 50-day and 200-day moving averages. Ordinarily, I would be skeptical of such a quick recovery, but MGM received good news last week that may help it continue climbing.

New Investors

According to Bloomberg, activist hedge fund Starboard Value has built a stake in MGM.

Activist investors are groups or individuals that purchase large numbers of a public company’s shares with the goal of obtaining seats on the company’s board. Usually their goal is to affect major change.

Starboard Value is most famous for taking over Darden Restaurants, Inc. (NYSE:DRI) in 2014. Darden operates Olive Garden and Longhorn Steakhouse, among other restaurants, and under Starboard Value, the stock rose 60% by 2016.

Money from an activist investor doesn’t guarantee success, but the price of MGM rose after the news. Investors seem to think this would be a positive change.

I’m also seeing significant open interest in MGM call options — approximately 20,000 contracts for the February $31 calls, and over 10,000 contracts for both the March $34 calls and March $35 calls. This tells me there’s a lot of bullish sentiment behind MGM stock.

Overcoming Resistance

I mentioned last week that “V-shaped” recoveries are rare. MGM rebounded right back up to where it was before Christmas Eve.

If you look at the chart below, MGM encountered some resistance at its 200-day moving average, and it hasn’t had a chance to retest its recent lows.

Daily Chart of MGM Resorts International (MGM) — Chart Source: TradingView

While V-shaped rallies are rare, not every company rebounding from December’s lows has good news behind it. The stock may need to head down and establish support before breaking out to the upside. But the bullish news of a new investor could buoy the stock, and MGM may find support well above its $21 low.

For theses reasons, I am recommending a bullish call option on MGM.

Buy to open the MGM Resorts International (MGM) Mar 15th $29 Calls (MGM190315C00029000) at $1.50 or lower.

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