Penn National Gaming (NASDAQ:PENN) is an interesting case of the volatility of human psychology. Initially, prospects for PENN stock were incredibly bullish thanks to the potential synergies involved with the Barstool Sports deal. However, when it became apparent that the novel coronavirus was not fake news, shares cratered. Rather quickly, though, speculation of a societal recovery lifted Penn back up.
Today, even with suffering a sizable 5% loss on the June 25 session, shares are trading in double-digit territory on a year-to-date basis. Still, the sharp decline in PENN stock may be the first indicator of trouble ahead. Unfortunately, the underlying gaming specialist faces two major risks.
Obviously, the first worrying headwind is the economy. Earlier in June, the environment appeared favorable for PENN stock. The May jobs report jump-started investor sentiment, with the labor market adding 2.5 million jobs. Later, retail sales for that month witnessed a surge in consumer activity. From this latter point, we could take away that people were sick and tired of being cooped up at home.
But the latest data from initial weekly jobless claims gave everyone a harsh reality check. For the week ending June 20, 1.48 million people filed for unemployment benefits. This tally was higher than the consensus forecast calling for 1.35 million, the second consecutive time when actuals exceeded estimates.
To be fair, the number of people on continuing claims fell to 19.52 million. Still, any intellectually honest person will look at this figure and recognize we have a long road ahead of us.
At the very least, it suggests that American consumers will rethink their spending habits on fears of another economic meltdown.
A Second Wave Would Be Particularly Cruel to PENN Stock
In a story about Inovio Pharmaceuticals (NASDAQ:INO) that was published on June 8, I prepared a chart with a simple, straightforward title: America did not flatten the curve. I encourage everyone to look at it not because I produced it. Rather, it juxtaposes the U.S. daily cumulative coronavirus cases curve with Italy’s true flattening.
Also, I want to demonstrate that the situation we find ourselves in now was very predictable. When the threshold of daily cases remains elevated at around 20,000 infections, you have a problem. Toward the end of the month, the near-term average jumped to 30,000. Now, I’m told that we hit an all-time record at slightly over 37,000 cases for June 25.
Not surprisingly, INO stock has exploded higher. But that leaves investments that are dependent on a sustained reopening campaign vulnerable to downside. And that’s exactly what happened to PENN stock.
Frankly, I believe that if you already enjoyed significant profits from speculating on PENN, you should pocket those profits. At the least, consider taking some off the table. It’s not just for a potential resurgence of a health crisis. If a second wave materializes – and that’s probably what you would call this present emergency – it would be particularly devastating to PENN stock.
About a week ago from the time of this writing, Major League Baseball closed all spring training facilities due to the spike in coronavirus cases. Baseball was already questionable about having a season take place this year. Now, it may be untenable.
More critically, we could be staring at the cancellation of all sports this year. For instance, the NFL cancelled its Hall of Fame game, which traditionally opens the preseason. As well, the New York City Marathon has been called off.
Cutting Their Losses
From another angle, however, the notion of sports leagues abandoning their seasons might seem ludicrous. After all, motorsports have made a comeback to a rave reception. In addition, there’s plenty of money at stake.
However, the team owners within the various leagues are under immense pressure. If the risks don’t justify playing and people involved with the sport get sick, the owners could face liability issues. Perhaps not from the star athletes, who live great lives. Instead, the many nameless, faceless individuals who make professional sports entertainment happen could file suit.
To avoid such liabilities, pro sports could just call it a day. But if that happens, PENN stock, which is now more levered to sports gambling, could suffer deep losses.
Yes, it’s just my opinion. Nothing is set in stone. However, if you’re looking at trends, you’ll notice that this headwind has been brewing for some time. I’m not saying short Penn National. But you don’t want to go down with this ship if you don’t have to.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.