On May 27, as part of Nevada’s planned reopening of casinos, MGM Resorts (NYSE:MGM) announced that the Bellagio, New York-New York, MGM Grand Las Vegas, and The Signature would reopen on June 4. As more of its casinos also reopen in the days and weeks to come, owners of MGM stock might be gaining confidence that revenues and profits will soon return.
While that’s a nice sentiment, investors aren’t going to know the extent of the casino and hotel operator’s return to normalcy until the fall, possibly later. So, despite a desire to see things return to the way they were before the novel coronavirus, an investment in any casino at this point requires patience and realistic expectations.
Casinos to Operate at 50% Capacity
As my InvestorPlace colleague, David Moadel, recently reminded our readers, Nevada’s casinos will only be able to operate at 50% capacity and will have to limit the number of people in these facilities.
If you don’t think this is a big deal, think again.
I live in Nova Scotia. On June 5, the province allowed restaurants to open for the first time in months. Like Nevada, restaurants in the province have to operate under similar safety precautions, including 50% capacity, social distancing, the wearing of masks by employees, etc.
My wife and I went to our favorite cider joint the other night and our waitress was telling us how much more work is required to serve fewer customers. Go into any Starbucks (NASDAQ:SBUX), and you’ll see a lot of staff working despite fewer customers.
Therefore, it’s safe to say sales will return to a degree, but profits will likely fly out the window until such time as the extra safety precautions go by the wayside. Now multiply your local restaurant’s hit by a million-fold and that’s the pain MGM’s casinos will continue to feel despite being open for business.
And this doesn’t take into consideration the virus returning in a big way later this summer and into the fall.
This is why my colleague pointed out that UBS analyst Robin Farley has “reiterated her ‘neutral’ position on MGM stock…On top of that, Farley reduced her price target on the shares from $35 to $18.”
As I write this, MGM is trading at just under $19, suggesting it could have a little downside ahead.
Casino Stocks Are Hanging in There
At the end of April, I suggested that both MGM and Penn National Gaming (NASDAQ:PENN) could be trading “in the low teens by sometime in June.” Ten days into the month, I wasn’t even close as both have ridden a very ambitious recovery of the markets in April and May.
I, like my colleague, believe caution is the right call at this point. We don’t know what’s around the corner on the reopening front. Moadel suggests a moderate bet if you must. I would agree.
However, as I consider myself the “options” guy, you might think about the VanEck Vectors Gaming ETF (NASDAQ:BJK) as a possible alternative.
Avoid Company-Specific Risk of MGM Stock
As casino stocks go, I think MGM is one of the best. It’s got a good brand, its debt isn’t out of control, and its interest coverage is reasonably healthy. But it still operates casinos and hotels. It can’t run away from this piece of reality.
Now, if you were to buy VanEck’s ETF, MGM is the seventh-largest holding with a weighting of 4.23%. It’s not a huge amount of exposure, but it’s not small either. Further, it is one of BJK’s top 10 holdings, which account for 57.05% of the ETF’s $50.8 million in total net assets.
There are 41 holdings with all constituents generating at least 50% of their revenue from gaming. As a result, it is considered a pure-play ETF focused on global gaming. For example, the U.S. accounts for less than 43% of the global allocation.
If you’re not used to management expense ratios — it charges 0.66% annually on the $50.8 million in total net assets — you might find that quite high compared to many of the plain vanilla ETF index funds that investors continue to pile into.
ETF’s are used for all kinds of different reasons. Using BJK as a diversified tactical solution is just one of them.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.