Casino stocks were all the rage on Wednesday with major players from Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) to MGM (NYSE:MGM) galloping higher anywhere from 8% to 11%. They’re following in the footsteps of Penn National Gaming (NASDAQ:PENN), which was one of the first gaming-related companies to see its shares rise from the abyss. Let’s break down why buyers are finally rolling the dice in PENN stock and friends, even though they sit in one of the hardest-hit industries during March’s massacre.
Investors are warming to casinos because of multiple reasons. First, they had been beaten senseless with prices falling to levels that were baking in everything but Armageddon. With coronavirus concerns rapidly receding, many are taking the view that the selling was overdone. Any whiff of evidence that things aren’t as bad as expected is being used as an excuse to buy.
Second, sports leagues are moving closer to restarting, and some casinos are now opening their doors to gamblers. Investors’ focus has shifted from the perils of prolonged stay-at-home orders to the promise of economies reopening and consumers finally emerging from their bunkers.
Third, the stock market is booming. Aided by record-setting government stimulus and a central bank dedicated to doing all in its power to support a flagging economy, traders are snatching up equities with abandon. At first, it was large-cap tech stocks leading the charge, but the meltup has since broadened out to include small-caps and some of the most downtrodden. You’ve seen it in oil stocks, financials, airlines and on Wednesday, casinos.
Insane Volatility and An Upgrade
To anyone that has been paying attention, Penn National Gaming separated itself from the rest of the casino and gaming space early on in the recovery. Its share price wasn’t spared during the bear market, ultimately falling to $3.75. But buyers returned, almost as quickly as they left. And while the likes of WYNN, LVS and MGM remain a far cry from their highs, PENN stock has almost completely recovered.
Honestly, the roundtrip has been utterly nuts. Shareholders who held fast through the 90% descent without abandoning ship deserve a round of applause. It’s incredibly rare to fall that much in less than a month, let alone to recover it in a single quarter.
Bank of America analyst Shaun Kelly just raised the firm’s price target for PENN stock to $41, citing positive data surrounding the company’s reopened properties, as well as potential profits from its purchase of Barstool Sports. With the stock closing at $32.71 on Wednesday, the $41 target implies 25% of further upside.
PENN Stock Chart
If you can look past the wild volatility, the price chart for Penn National has been very constructive since the mid-March low. But it’s the sharp increase in momentum last month that really catches the eye. A volume surge drove the stock from $16 to $32 in just seven days! Since then, it has held onto the gains by basing sideways. I count that as very bullish. The 20-day and 50-day moving averages are also rising beneath the stock to confirm buyers’ control of the short-term and intermediate-term trends.
A return to its $39.18 peak seems inevitable.
Implied volatility has fallen considerably since March, but it’s still sky-high at 99%. I can’t say I’m surprised though, given the stock’s crazy realized volatility. If you’re a willing buyer, I like selling puts as your avenue for exposure. The payouts are significant, and the margin required to enter the trade is small. Together, that translates into a compelling return on investment. This is the same strategy I recently suggested on DraftKings (NASDAQ:DKNG).
The Trade: Sell the July $30 puts for around $3.
If PENN stock stays above $30, you’ll capture the max reward of $300 per contract. If it sits below $30 at expiration, you’ll be obligated to buy 100 shares at an effective purchase price of $27.
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