Penn National Gaming (NASDAQ:PENN) stock looks like a classic long shot that paid off. The novel coronavirus dealt Penn a very weak hand, and the company had forked out a lot of cash to buy Barstool Sports at just the wrong time. It appeared that this aggressive bet could help lead to Penn’s bankruptcy given the gaming shutdown since the virus started.
However, the company has hit a hot streak, and its shares have traded back up from a low of just $4 in March to $16 now. That’s a quadruple in just six weeks. Not surprisingly, risk-loving traders have piled into Penn, and it’s been a match made in heaven. But is it still worth rolling the dice with Penn going forward?
Let’s dive in.
Barstool Sports: The Portnoy Effect
From a branding perspective, Penn’s decision to buy Barstool Sports was a brilliant one. Even prior to this crisis, Barstool was a fantastic brand in its own right. And it was particularly helpful in attracting millenials and other younger customers that might have had negative stereotypes about casinos previously.
Barstool’s lead personality, Dave Portnoy, is a particular asset. With live sports currently on hiatus, Portnoy has taken to day trading to keep his speculative juices flowing. This has been a fantastic development for Penn because Portnoy is on Twitter (NYSE:TWTR), live streams and other social media outlets throughout the trading day.
Portnoy is trading large sums of money, and often makes or loses six figures in a day. It’s fine drama, and tons of traders are watching. When they do, they hear about how Portnoy is involved with Penn, and how he owns a ton of PENN stock. By association, when many traders think about gaming stocks, they think about Penn. This is an incredible branding opportunity. CNBC star Jim Cramer recently praised Penn, while also saying that,”Portnoy’s a disciple of some of the greatest investors of our time.”
We’ve seen the results of this. The brokerage firm Robinhood, which tends to cater to millenial investors, has tons of customers who love Penn. The website Robintrack aggregates data counting how many investors own individual stocks on Robinhood over time. Penn stock soared from having 1,000 Robinhood owners to 40,000 owners immediately following the Barstool acquisition. And since Portnoy started live trading the market, Penn is now up to 100,000 owners on Robinhood. This has provided massive support for Penn’s shares compared with other gaming companies that don’t have a charismatic spokesperson.
Penn Still Faces A Difficult Situation
Despite having a leading figure getting Penn’s name out there, the company still faces steep challenges. It is a gaming company whose operations are largely on pause, after all. Worse than that, Penn has a truly immense amount of debt.
As of last quarter, Penn National Gaming $2.3 billion in long-term debt. Alarmingly, since it leases many of its properties rather than owning them outright, it also has plenty of future lease obligations on the balance sheet. And while the casinos may be closed for now, the landlords still expect to get paid sooner or later. Against those liabilities, Penn had just $437 million in cash. It is adding to that pile by selling its Tropicana casino, but it will need more liquidity than that.
Investors had hoped that President Donald Trump might try to work in major relief for casinos in a stimulus bill, given his past involvement in the sector. However, so far, this aid has not arrived. This leaves companies like Penn scrounging for funds to figure out some path to when revenues start rolling in again.
PENN Stock Verdict
Normally, a small gaming company like Penn with a ton of debt would be a bad bet in current circumstances. However, with Dave Portnoy giving the company incredible visibility in the trading community, it still has a chance of hitting the jackpot. On the whole, though, the bears have the more compelling arguments. InvestorPlace contributor Josh Enomoto recently described Penn’s situation as “almost stupidly risky.” And that’s a fair assessment.
The company’s balance sheet is terrible. And as Enomoto argued, if live sports don’t come back soon, the company could be toast. In any case, it’s bizarre that Penn shares are now back up to where they were in 2019 before the virus hit. Regardless of how quickly the economy recovers, losing most of a year of professional sports is simply devastating for a sports gambling company.
Dave Portnoy and Barstool Sports are an absolutely fantastic marketing device for Penn. So it’d be risky to bet against the company. However, Penn will need to take advantage of its visibility to raise funds and secure its financial position as quickly as possible. Otherwise, Penn’s miraculous rally could soon fizzle out.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.