MGM Stock Is a Tough Buy With Surging Coronavirus Cases

MGM stock is a tough buy, as gaming revenue is still at risk.

The “Reopening America” trade has drawn a lot of attention from investors. Airline, cruise, gaming, restaurant and hospitality stocks have been spiking as a result, and MGM Resort (NYSE:MGM) has enjoyed the ride. MGM stock rallied more than 300% from the March low to the June high.

However, shares are now up “just” 168%. Is more downside heading toward MGM, or is this a dip that investors should buy?

Fears of a Second Coronavirus Wave Makes MGM Stock a Risky Bet
Source: Jason Patrick Ross / Shutterstock.com

The problem with the “Reopening America” trade is that it was a very swift and boisterous move higher. If you missed even a few days of it, then it likely wasn’t worth chasing.

Now coming off that high, the group is losing momentum at a time where cases for the novel coronavirus continue to spike. The recent spike has states that reopened quickly rethinking their strategy. In some cases, like Texas, they are hitting the brakes and reversing some of those decisions.

For gaming stocks like MGM, those are not the type of headlines that are conducive to a higher stock price. Let’s explore this one a bit more closely.

Valuing MGM Resorts

There’s no way to put it, other than to say MGM Resorts was buried amid the coronavirus selloff. Shares fell 83% from the 2020 high, while the catalyst for such a decline is rather obvious.

With America shutting down, gaming and hotel stocks were going to take an enormous hit. Worse, sports were shut down too, as gaming revenue dried up for casinos. Now, sports is a problem for Disney (NYSE:DIS), but it’s also a pain for Penn National Gaming (NASDAQ:PENN), Wynn Resorts (NASDAQ:WYNN) and others.

That said, there is some light at the end of the tunnel. After seeing a “strong reopening weekend,” MGM planned to open even more of its properties. In other words, people are eager to get back to normalcy — and that includes going to Vegas.

If we do see a return to action in sports, then gaming stocks will have another revenue source opened up. It’s the fear of a second wave shutting the country back down that’s keeping investors at bay. Or if not a lockdown, a wave so severe that travel remains critically suppressed.

When the company most recently reported earnings, MGM missed on revenue and earnings estimates. That’s no shocker, given the events we’ve seen unfold. However, it’s the third consecutive quarter the company has missed top and bottom-line estimates.

Analysts expect MGM to lose $1.74 per share this year, followed by another loss in 2021 of 92 cents per share. That’s even as analysts call for a 60% rebound in sales next year.

At the end of the day, it’s a game of sentiment. If Vegas is open, sports come back and travel trends are strong, MGM stock should be okay. If traveling is weak and coronavirus cases continue to spike, I’d be hesitant to be long.

Trading MGM Stock

chart of MGM stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com 

The first thing I did when I wanted to get a look at MGM stock, was look at the charts. The second thing I did was size up the balance sheet. In regards to the latter, MGM seems fine.

Current assets of $7.6 billion easily outweigh current liabilities of $2.6 billion. From that perspective, liquidity isn’t an issue for me. While cutting the dividend and working on netting out its free cash outflow, an increase in revenue should help keep the financials afloat.

As for the stock price though, it’s starting to struggle. Momentum is waning, as MGM stock breaks below the 38.2% retracement and the 50-day moving average. A correction from $24 down to the 50-day moving average just under $17 should have been a good buying opportunity. But it’s failing to hold, showing that bulls don’t have control demand is not strong enough.

Below the 50-day moving average and investors will have to see how uptrend support (blue line) holds up. I don’t like putting all my eggs in that basket though, particularly as other more significant support levels failed.

On the upside, let’s see if MGM stock can reclaim the 50-day moving average, putting $19 to $20 back in play.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/mgm-stock-is-a-tough-buy-with-surging-coronavirus-cases/.

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