Global commerce is almost completely halted, and many industries are dead in the water. Moreover, the novel coronavirus pandemic has hit entertainment stocks especially hard, and they are in dire straits.
This is not a black mark against the management teams of those companies, including the ones we will discuss today. This was a surprise disruption due to a new virus that was hard to predict. The people in charge will learn from this, and going forward they will add a line item in their financial statements about such a scenario. But for now, the damage is done as they deal with the consequences.
Additionally, investors can usually assess the potential of a stock’s performance from its fundamentals. That is to say that they can read the profit and loss statements and study the balance sheet to judge the risk to the reward. But for now, all of these assumptions are useless because there is virtually no income flowing through most of these corporations.
Some entertainment stocks have the luxury of online gambling. But for the cruise lines, there is nothing but expenses — and they are piling up.
We have seen the U.S. government commit help for the essential businesses but for now, gambling and entertainment companies are not part of the conversation. I bet that eventually they will help any major and high profile company one way or another. Until then, though, the bullish thesis for these entertainments stocks cannot include a bailout. They will have to stand on their own merit, and the idea of going to zero has to be on the table.
This by definition makes the bet on today’s stocks of the speculative nature. And the three companies in question are:
That said, let’s roll the dice and push off into the unknown.
Entertainment Stocks to Buy: Carnival Cruise Lines (CCL)
This global pinch is new to everyone, so there are no experts. Investors will need to use logic and a whole lot of faith to tackle this unknown. Therefore, it is not too surprising to see CCL stock fall into levels it hasn’t seen since 1992. This is to say that in the face of extreme adversity, investors almost completely gave up on it!
The correction this time is far from what usually happens on a bad quarterly result or two. This is the reaction to the complete shut down of the world. No one is booking vacations, and more specifically, cruising is off the table for a long while even after global resumption. All prior bookings are also cancelled, so there won’t be an income stream for months. For now, these companies are dead in the water — pun intended — and only a miracle headline can save them.
Of the three entertainment stocks mentioned here, this is my least favorite because it will be the last to recover. I bet that people will need more convincing to lock themselves on a ship for a week or two than spend a couple of days at a casino. Besides, while we are locked at home, we still have the option to gamble online. So going long on CCL stock here is a complete bet on the recovery and knowing that it will require extreme patience.
Overall, though, the course will be long and full of rough seas.
Caesars Palace (CZR)
Early last week, CZR stock popped up on my radar and I hesitated to pull the trigger. Even though the fundamentals are non-existent while shuttered, the chart looked promising for a bounce. But given the uncertainty that markets were going to face on Thursday’s new jobless claims report, I thought the better of it.
In hindsight, Caesars stock performed well, as it rallied 25% in four days. Equity markets in general went crazy happy in spite of the terrible jobless news. In fact, the small caps registered one of their best weeks ever on record.
The rally off the lows so far was the easy part. It is one thing to bounce off the all-time lows, but another to sustain the buying momentum into resistance. CZR stock will face heavy opposition between $8 and $10 per share. Evidence of this lies in the candles set on March 11th through the 13th (pictured). This is not to say that this will be the end of the rally, but it’s not an obvious point of entry. If there is good news in having a crash this big, it’s that it leaves almost unlimited upside potential. It is almost a guarantee that the upside outweighs the downside risk, but it will take time.
That said, the decision for long-term investors to buy CZR stock is a heck of a lot easier than traders looking for a quick flip. That easy lay up has played out already. The next upside trigger will need a headline incentive of a technical trigger. So while they wait for good news, traders can expect a rally to start if the buyers can breakout of the $9 zone.
It won’t be easy because it will mark the 50% Fibonacci level that machines love to sell on the rebound. So patience will be key because jumping the gun makes for a quick way to turn a trade into and investment. If there is no trigger, then there should be no trade. Otherwise, CZR is a better buy on the dip towards $6 per share.
Wynn Resorts (WYNN)
In 2014, WYNN stock started a two-year, 70% correction. Then it finally bottomed in 2016, and did very well for two years. The stock recovered most of its losses, but topped out at $200 per share. Then, the Steve Wynn scandal derailed the bulls’ efforts and the stock has yet to fully recover. This coronavirus crisis added to the struggles, and WYNN stock hit even lower-lows thanin 2016; But so did all entertainment stocks.
Fundamentally, it’s not a management issue this time. The story is clear now because there is virtually no income flowing through the top line by governmental orders. The hotels are closed worldwide, and China is the first place that is likely to restart. But even this is still uncertain when and under what restrictions. Technically, there are reasons to worry from the chart. The current levels became a target once WYNN stock lost $90 per share. But from here, it is at levels where all logic does not necessarily apply.
As it rallies back, WYNN stock will face resistance as it approaches $80 per share. The $50 per share has been a zone of major contention since 2004. It also came into play during the financial crisis and the 2015 correction, so clearly investors were not done settling that fight. Luckily so far the bulls are confident bouncing off it, but if that changes then another trap door opens.
Nothing is set in stone, but WYNN stock should deliver great profits when the world goes back to normal. While there is no rush to pile into entertainment stocks, there will be a way out for them soon enough from this business chasm. I don’t expect that over seven billion people will stand to be cooped up too much longer. And when they do finally come back to normalcy even if in baby steps, there will be a slingshot effect.