When the novel coronavirus sparked the devastating selloff in March, Penn National Gaming (NASDAQ:PENN) didn’t look like it was going to make it. Penn stock plunged from almost $40 per share to less than $4, a 90% plunge, in less than a month.
That type of volatility is rare and, while the overall market didn’t fall 90% in a month, many other stocks plunged 50% or more during that time.
The bout of volatility and the fallout we’ve experienced from the coronavirus has been unprecedented in modern times. Lockdowns and stay-at-home orders swept across the world. Businesses shuttered, completely eliminating their revenue.
The Federal Reserve and the global central banks resorted to massive amounts of stimulus —trillions of dollars in the U.S. alone — to keep the economy from falling apart.
For now, the stimulus seems to be working, and it’s part of the reason for the gains of PENN stock.
Breaking Down Penn National Gaming
Penn’s shares hit a new high on June 5, but they since pulled back about 18%. Despite the dip, the shares are still up almost 700% from their March low.
Such a rally could turn off most investors, since they feel that they’ve already missed the boat. Instead, they may be inclined to go with stocks like MGM Resorts (NYSE:MGM) or Wynn Resorts (NASDAQ:WYNN). As painful as it is to have missed such a big rally, though, Penn could climb above its current price.
Penn was hit by a trifecta of fears. First, its gaming revenues were hit hard as lockdown orders crushed its casinos. Then the company’s balance sheet was a major concern, as its current liabilities outweighed its current assets at $905.6 million to $642.8 million. Finally, investors worried that the recession would weigh on the company’s gaming revenue even after the lockdowns ended.
But those risks are abating. Lockdown orders are vanishing and many gamblers have returned to Las Vegas. Many Americans want to get back to normalcy. We’re seeing that trend play out around the country, as the chances of a V-shaped recovery begin to rise.
Last but certainly not least, Penn took action to solidify its balance sheet. It raised capital, causing its current assets to be worth more than its current liabilities, at $1.27 billion to $813.9 million, respectively.
If the country can avoid a second lockdown and if the economy keeps recovering, Penn stock can continue to climb. Ultimately, I would love to see one more strong pullback by the shares (I’ll discuss the charts below) because with Penn taking a stake in Barstool Sports and with professional sports potentially resuming, the shares could advance.
Trading Penn Stock
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The shares’ precipitous decline is clearly visible on the chart. They plunged from $40, which is now the stock’s resistance level, to $4 in just a few weeks. During the rebound, investors had the opportunity to buy the shares for less than $10 and again for less than $20.
For the record, I did not buy the shares at either of those levels.
May 11 is highlighted on the chart with a purple arrow. That’s the day that Penn announced that it would raise additional funds. Even after that announcement, investors had more chances to buy the shares, as Penn didn’t rally above its resistance for another five trading sessions.
Ultimately, I’m looking for the shares to dip into the $20 to $22.50 area. Near the latter price is the stock’s 100-day and 200-day moving averages. In between is the 50-day moving average near $21, while $20 was resistance in May.
A drop into that zone, almost 50% from the highs, would give investors a much better risk/reward ratio. While looking for a dip of that magnitude seems greedy, we’re already halfway there. And the firm’s casino business will not go from zero to 100% overnight. A deeper correction by Penn stock — particularly if the stock market falls significantly — could make Penn stock a great buying opportunity.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
