On March 18, Penn National Gaming (NASDAQ:PENN) hit a 52-week low of $3.75. Fifty-five trading days later, PENN stock hit a 52-week high of $40.14. The casino operator’s stock jumped almost 1,000% in less than three months of trading.
The question I have is, how long it will take Penn’s stock to jump another 970%? Let’s consider the possibilities.
PENN Stock Gets to $386
For a second 970% increase, Penn’s stock must increase in share value to $386.04 from where it closed June 5 trading at $36.04 a share. The closest Penn has ever come to $386 was on June 5 when it hit its 52-week high.
Penn has a one-year total return of 93%, a three-year annualized total return of 23%, a five-year total return of 16%, and a 10-year total return of 12%.
So, to get to $386 based on an annual total return of 93%, it would take a little more than three-and-half years. I would think the odds of this happening are astronomically low. Based on its three-year total return, it would take the company’s stock about 11.5 years to hit $386. That still seems like a difficult accomplishment.
How many companies do you know that have appreciated by more than 20% every year for more than a decade? I don’t know many.
Of course, stocks don’t go up in a straight line. You have situations where they go sideways for six months and then rocket higher, as was the case for Penn during March, April, and May.
The reality, then, is that investors who didn’t gamble on Penn recovering from its March 18 52-week low, have missed an opportunity for a quick profit. Who knows when the next one comes along.
The question for most investors at this point should be: Can Penn National Gaming deliver the goods over the next couple of decades?
I don’t know about the next couple of decades, but InvestorPlace contributor Louis Navellier recently suggested that more market-beating returns were on the way for Penn National Gaming shareholders.
“PENN stock isn’t a direct bet on sports betting, but the company does provide indirect exposure to this niche market. That’s because Penn National Gaming invested $163 million in sports culture blog Barstool Sports in February,” Navellier wrote June 5.
“… There are plans in progress to roll out a Barstool Sportsbook app in anticipation of the 2020-2021 football season. With this, Barstool Sports’ extensive fan base should provide a robust enhancement to Penn National’s already sizable database.”
Navellier finished his article by suggesting that if you missed out on its big run over the past three months, the Barstool Sports collaboration, along with 41 gaming facilities in 19 states, provides plenty of growth in the coming months to push its share price higher.
Of course, that doesn’t mean it’s getting to $386 anytime soon.
It Doesn’t Have to Get to $386 to Do Well
Penn National Gaming has a five-year average forward price-to-earnings ratio of 19.1 and a trailing 12-month P/E ratio of 58.4 on the same five-year average. Based on 117 million shares outstanding and a $386 share price, it would have a market capitalization of $45.2 billion.
Divide that by 58.4 (five-year TTM P/E), and you get earnings of $774 million, or $6.62 a share.
The only time Penn came anywhere close to this kind of earnings was in 2017 when it got a $498.5 million income tax benefit. Otherwise, the casino operator’s per-share earnings have been anywhere from one cent a share in 2015 to $1.19 in 2016, and 37 cents in its latest fiscal year.
So, it’s pretty clear Penn’s not going to see $386 a share in this decade or even the next one.
In late May, I suggested that investors consider looking at other casino stocks, given how far PENN stock had come over the previous four weeks of trading. And even though I believe its investment in Barstool Sports is going to pay dividends for the company in the long-term, in the short-term, its stock appears too hot to handle.
Until Penn announces its second-quarter results in early August, which aren’t expected to be good, the stock’s volatility should be quite high. Long-term, I think Penn’s a good investment. However, I think it’s going to take a major catalyst to push the stock into the $40s or higher.
If you own PENN and are a buy-and-hold investor, I wouldn’t sell, keeping some dry powder in reserve should it fall back into the $20s. If you’re not a long-term investor and only bought to make a short-term play, I’d definitely exit before some of your profits disappear.
And you can forget about a 970% increase anytime soon.
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.