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Buy Mangled MGM Stock While Casinos Are Still Closed

Can pessimism turn into profit? Steel-stomached MGM stockholders will find out soon enough.

In a world of mandatory lockdowns and social distancing, MGM Resorts (NYSE:MGM) stock isn’t exactly a market darling. The hotel, resort and casino operator’s share price has reflected these hard times.

There's No Need to Dump MGM Stock Now, but Definitely Don't Buy It
Source: Jason Patrick Ross / Shutterstock.com

Does this mean that cautious investors should avoid MGM stock completely? And, should current shareholders abandon ship in pursuit of greener pastures?

The answer depends, to a large degree, on whether you’re focused on the present or the future.

And it depends on whether you see a bright future for the entertainment industry, and the economy as a whole. The question of valuation also figures into the mix.

Let’s see if we can balance the above and build a case that MGM is a hotel-and-casino stock worth betting on.

Analysts’ Arrows

When big-bank analysts take aim at downtrodden companies, the injuries can be deep and lasting. After all, analysts have the power to sway opinions and scare prospective investors away.

Lately, a couple of highly influential analysts have aimed their proverbial arrows at MGM Resorts. Jefferies analyst David Katz, for one, has decreased his price target on MGM stock from $27 to $22. That’s a hefty 18.5% price-target haircut.

In a vicious one-two punch combo, Katz followed this up with a downgrade on MGM stock from “Buy” to “Hold.” Katz opined that Las Vegas is “likely to recover more slowly than other markets with estimates likely coming lower.”

And so, Katz expects MGM shares’ valuation to remain low. The thing is, with a trailing 12-month price-to-earnings ratio of just 3.14, the valuation is already near rock-bottom. Is Katz really suggesting that it will stay there?

And perhaps Bank of America analyst Shaun Kelley is expecting the same. In fact, his assessment of MGM stock makes Katz’s appraisal look downright optimistic.

To be specific, Kelley set a price target of just $15 on the stock. Adding insult to injury, Kelley also downgraded the shares from “Neutral” to “Underperform.” Plus, Bank of America declared that it could take MGM Resorts four to six years before the company returns to 2019 levels.

Things Will Be the Same, but Different

Whether these analysts’ barbs are good or bad for MGM stock is a matter of perspective. The classical model of value investing would seem to suggest that the best time to buy a stock is when the “experts” hate it.

Seeing the MGM situation as a glass half full takes a bit of imagination and a whole lot of forward thinking. Consider, for instance, that Nevada Governor Steve Sisolak has established June 4 as the proposed reopening date for the state’s casino industry.

In the realm of resorts and casinos, the Nevada market is all-important. The state’s governor’s plan, therefore, is enormously impactful for MGM shareholders. This summer, the swing from extreme pessimism to sudden optimism could be swift and substantial.

For cautious traders, however, this optimism needs to be measured and carefully considered. It is true that MGM Resorts plans to reopen four of its Las Vegas-based properties. However, we shouldn’t expect reopened casinos to look and feel exactly as they did before the Covid-19 pandemic.

For one thing, casino patrons should expect to see stand-alone hand-washing stations, the sight of which could take some getting used to. Patrons will also need to adapt to new social-distancing protocols on the casino floors.

That being said, the pent-up demand for entertainment amid the lockdowns must be tremendous by now. If a modified version of the hotel-and-casino experience is all that’s available, so be it. Folks will still, in all likelihood, be eager to gamble away their hard-earned money even with modified post-pandemic conditions.

The Takeaway on MGM Stock

It’s possible that Bank of America is correct in projecting a multi-year time frame for MGM Resorts’ return to 2019 conditions. Yet a recovery in MGM stock doesn’t require a complete return to normalcy. It only needs a glimmer of hope that the nation, and its gambling hubs, can thrive once again.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/buy-mangled-mgm-stock-while-casinos-are-still-closed/.

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