In my popular gallery, “30 Stocks on a Deathwatch,” I included several casino- and gaming-related companies that were at great risk of falling apart, such as MGM Resorts (NYSE:MGM) and Eldorado Resorts (NASDAQ:ERI). In a future update, I could easily add Penn National Gaming (NASDAQ:PENN). Without a reasonable hope for viability in the foreseeable future, PENN stock is almost stupidly risky.
Before you start writing a nasty email to me, it’s not that I have anything against the gaming sector. Prior to the coronavirus, I had positive feelings about several casino stocks. With the labor force responding positively to the Trump administration’s policies combined with a record-setting bull market, the broader gambling arena provided entertainment for those who could afford it.
Unfortunately, the novel coronavirus has changed everything. Until we can get back at least some semblance of our old normal, PENN stock is likely to incur volatility.
And as our own Chris Markoch explained, the situation does not look good for Penn National Gaming. Obviously, this is an organization that depends on sports gambling. Thus, the timing of the national shutdown couldn’t be worse. Markoch wrote:
…At the end of January, sports betting was heading towards its main event, the Super Bowl. But sports betting is a year-round industry. That is, until it’s not. And that’s the problem we have right now.
Therefore, PENN stock is at the mercy of multiple factors, ranging from the coronavirus’ infection rate to consumer sentiment to when professional sports leagues decide it’s safe to resume operations. Further, this latter point is a matter where I assume significant risk.
Put another way, I’d be very surprised if we have a 2020 NFL season.
For PENN Stock, the Worst-Case Scenario Could Get Worse
On the surface, what I just said sounds ridiculous. First, you have the infection curve in the U.S., which has flattened significantly since state governments imposed stay-at-home orders. Second, we’re heading toward the warmer summer season. Theoretically, this should help combat the virus.
However, White House health adviser Dr. Anthony Fauci argued that he is “convinced” that the world will continue to have coronavirus in the fall. Part of the reason he believes this is due to “the degree of transmissibility.”
Personally, I’m not a big fan of Dr. Fauci because if we followed his advice to a T, we’ll destroy our economy. That is the biggest health risk to our society, in my opinion. But my opinion doesn’t matter. And if Dr. Fauci is correct, this would bode extremely poorly for PENN stock.
With the cooler weather combined with the massive crowds in NFL stadiums – except for the Los Angeles Chargers, which may see five fans at any given game – a second wave of coronavirus could hit like a hurricane. Of course, in that situation, the NFL may consider playing games without fans. So long as the games are broadcast on television, PENN stock would have a lifeline.
But I’m not really sure if that’s feasible. For one thing, football is a raucous game. Not having any fans in the stadium would be a jarring experience that may negatively affect the NFL’s product.
More importantly, we already saw the NBA attempt to play a restricted season to disastrous results. One by one, basketball players – including those who didn’t take the virus seriously – fell ill to Covid-19. If the coronavirus could knock out these young, elite athletes, it will easily do the same with footballers who frequently contact each other.
Bad News Even If Football Returns
In a world where we can’t get a break from bad news, it’s perhaps naïve to assume optimism. Nevertheless, for the sake of argument, let’s pretend that the NFL returns this coming fall. Would that change the narrative for PENN stock?
I highly doubt it. Frankly, just like the folks who compared the coronavirus to the regular flu didn’t take the outbreak seriously, we risk making the same mistake with the imminent economic crisis. Forget a V-shaped recovery: at this point, I’ll be grateful if we can avoid an I-shaped freefall.
On paper, the labor force lost more than 26 million jobs in the past five weeks. That’s bad but to some, it seems better than what was feared. But according to one economist’s estimate, this translates to a 23% overall jobless rate when bringing other factors into consideration.
Here, the most pessimistic forecasts of our economy are probably the most accurate. According to a study by the University of Southern California, more than half of Los Angeles is now unemployed. You may want to read that last sentence again.
So, even with sports back, the economy will not return to normal. And unless people have lost their minds at that point, the sports gambling industry will have very few clients. Therefore, this is not the time to get cute with PENN stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
