It’s no surprise Penn National (NASDAQ:PENN) stock has held onto its epic gains from the past few months. With its casinos coming out of lockdown, investors are still itching to wager on a rapid recovery. But, more importantly, Penn’s sports wagering catalyst (its partnership with Barstool Sports) stands to move the needle, if the NFL and NBA kick off their seasons on schedule later this year.
Yet, have investors bought only on the headlines? You can make the argument that’s the case. The company’s flagship casinos face lingering challenges coming out of the pandemic. It’s too early to tell how much of a game-changer sports wagering will be for the company’s bottom line.
With over-hyped catalysts, and underappreciated risks, Penn National is “priced for perfection.” That is to say, high expectations are currently priced into shares.
Sure, Penn has pulled back from its recent highs (above $40 per share). But, the stock could fall further, once investors realize it isn’t out of the woods just yet. With the risk casino traffic remains weak in 2020, coupled with uncertainty over the sports wagering menu this fall, now may be the time to cash out of this “too hot to touch” casino stock.
Breaking Down The Bull Case for PENN Stock
As I’ve said in prior analysis, the easy money’s already been made with Penn stock. Those who bought in the midst of the novel coronavirus saw massive gains in a matter of months. Even after the recent pullback, shares are still up more than nine-fold off their lows!
But, what’s the bull case for investors looking to enter the stock today? 90% of the company’s properties have now re-opened. Yet, with social distancing mandates, these properties are a long way’s away from operating at full capacity again.
With this in mind, one can assume the company’s bricks-and-mortar locations are still struggling. As InvestorPlace’s Larry Ramer wrote Jul 13, this may be what’s behind the company’s recent layoff announcements. If the company was “back to normal,” would they be aggressively cutting down their payroll?
Okay, so perhaps the company’s flagship regional casino business isn’t recovering as rapidly as investors assume. Maybe the company’s sports betting catalyst can help push shares higher in the near-term.
However, as this pundit recently pointed out, Penn’s partnership with Barstool doesn’t guarantee they’ll “crush it” in this fast-growing market. With names like Draftkings (NASDAQ:DKNG), FanDuel (OTCMKTS:PDYPY) having first-mover advantage, and other casino giants like MGM (NYSE:MGM) gunning for a piece of the action, the company has its work cut out for them.
In short, there’s no strong fundamental case for the company’s shares at today’s price. Right now, it’s speculators like driving the price action. But, this factor could soon be coming to a screeching halt.
How Things Could Turn on A Dime
So far, those betting against PENN stock have seen massive losses. Retail investors have been winning with this and other popular stocks, at the expense of the “smart money.” But, this dynamic may not last for long.
There are many risks on the horizon that could send shares lower in the near-term. Firstly, the company’s earnings release on Aug 6. If the company’s guidance falls short of expectations, it’s possible shares fall back to prior price levels.
Secondly, changes to this fall’s sports schedule could throw a wrench in the company’s sports betting expansion plans. InvestorPlace’s Chris Markoch talked about this in his Jul 9 write-up on the stock. The NFL plans to start on schedule. But, it looks like that’s not going to be the case for College Football. The NBA is still on with their “bubble playoffs” later this month. But, it’s still up in the air whether the next regular season will start on schedule later this year.
In short, a limited wagering menu is going to take a lot of the wind out of Penn’s sports betting catalyst. Without this potential needle-mover, it’s hard to see shares continuing to trade near its all-time highs.
Sell into Strength With PENN Stock
Despite the aforementioned risks, investors in Penn National stock don’t appear too concerned. Shares have pulled back from recent highs. But, they remain pretty much where they were before the pandemic.
Yet, there’s no guarantee this is going to last. With potential bad news on the horizon, shares could do a 180 in the coming months.
So, what’s the play? If you own PENN stock now, sell into strength while it lasts.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.