The market has been dealing bullish investors the equivalent of a full house lately. But when it comes to MGM Resorts (NYSE:MGM), overstaying one’s welcome or anteing up today, looks like a long-term losing proposition. Here’s why you need to be cautious about MGM stock.
Since ending its record-breaking losing streak in late March, the market has been on a tear. Thankfully a debilitating low has been confirmed as a major market bottom. It was no easy feat. And gains as much as 30% earlier this week in the S&P 500 have solidified the case for an emerging bull market in the aftermath of a novel coronavirus-driven correction.
Over the last three-plus weeks, MGM has delivered an even larger jackpot-like return of around 135% from its absolute low of $5.90 on March 18. That’s more than four-fold the S&P 500’s monster performance. And at MGM stock’s absolute bear-crushing best, investors were sitting on gains of 178%. But for the casino operator’s longer-term shareholders, it’s now time to know when to fold them as the late Kenny Rogers crooned in his famous ballad.
The good news for many companies is the U.S. could be open for business sooner rather than later. But the impact of the COVID-19 pandemic and a “new social-distanced normal” doesn’t bode well for MGM with its existing cramped, high-contact tables and one-armed bandits. The company’s domestic operations and those in other key markets like Macau are going to pay the price as average consumers rightfully take a big step back from riskier social environments. And its not just Joe Schmo and his family either. How about those famously massive corporate trade shows and other high-profile spectacles that MGM profits from? There’s more lost revenues for MGM to be certain.
If misery loves company, MGM isn’t alone. The industry is between a rock and a hard place. Peers Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) are obviously in trouble as well. That’s even if MGM and other casinos clean up their acts to a new and still-pending letter of the law. But truthfully, that’s a double-edged sword isn’t it? The thing is, it doesn’t take a MBA to know MGM and Sin City are in for a difficult road ahead trying to lure in individuals and businesses alike in a hands-off and sanitized post-coronavirus world.
MGM Stock Monthly Stock Chart
Source: Charts by TradingView
As indicated above, casino stocks LVS and WYNN are faced with similar sales challenges that will negatively impact earnings in the coming quarters and possibly much longer. But MGM stock stands ominously apart on the price chart too.
During the broader market correction, shares of MGM were hit harder in one eye-catching way than either Las Vegas Sands or Wynn Resorts. The longer-term monthly chart shows a clean and decisive break of uptrend support dating back to the financial crisis. By comparison, both other casino stocks are still clinging in volatile price action with their own long-term support lines. It’s another concern for the sustainability of MGM’s rally. And if three is a crowd, MGM is the casino stock to drop.
For MGM investors that are already positioned long, the suggestion is to cash out today. With the fallen trend line, shares sandwiched tenuously in between the 62% and 76% Fibonacci retracement levels and stochastics have yet to show signs of firming, the path of least resistance is down. If that advice sounds too critical, a move back below $11.50 certainly looks like sufficient visual evidence to exit as shares fail the March closing low.
For investors looking to place a bet on green in MGM stock, I’d stress waiting. Technically, if the stock can hold above $11.50 over the remainder of April and stochastics begin to firm up, the bull case will improve on the price chart. From there, and just maybe in a post-coronavirus world, come May or June, there might be more definitive reasons to allocate some risk capital into MGM stock.
Investment accounts under Christopher Tyler’s management do not own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.