Betting on green in the market has been a smart one over the past four months. Still, in a market made up of stocks, is that wager now more of a gamble in MGM Resorts (NYSE:MGM)? Let’s look at MGM stock off and on the price chart, then offer investors a stronger method for anteing up when uncertain outcomes are always unconditional. Let me explain.
The market’s gains since the novel coronavirus-driven low on March 23 could be called an amazing long shot that has paid off big-time. Led by the large-cap, tech-heavy Nasdaq Composite, investors have captured a return in excess of 61% from the history-making bottom. The scoreboard also shows record-setting highs for nearly two months and a year-to-date rake of around 17%.
The results are even more breathtaking in light of Covid-19’s still-fierce grip on the U.S. economy. Maybe more dazzling, casino operators have participated in the market’s fierce and seemingly ignorant bullish wherewithal. Within the group MGM has produced a Royal Flush for its investors.
Shares of MGM are up a massive 170% since hitting a March low of $5.80. For investors that did go long, they’ve also made out favorably versus the casino’s immediate peers Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN). Both of those stocks sport much weaker, though still impressive gains of 36% and 110%, respectively.
It makes me wonder, what is MGM doing to account for the unusually large spread, and what are the odds of that action continuing? Despite the obvious challenges at the casino operator’s physical resort properties, much of the excitement and out-performance in the stock is tied to MGM’s re-branded sports book operations and online BetMGM app.
Online sports betting was only legalized on U.S. soil in 2018. Currently and with just 22 states open for business, it’s still only the beginning for this new market with potential explosive growth going forward. According to Morgan Stanley, revenues of less than $1 billion in 2019 are forecast to jump six-fold to $7 billion over the next five years. Now that’s a trend worth betting on!
That’s not all MGM has working in its favor, either.
Appreciably, with the under-the-table sports betting market estimated at a staggering $150 billion, sales estimates and MGM’s partnerships with Yahoo! Sports, Buffalo Wild Wings restaurants, and most recently the NFL’s Denver Broncos, that piece of the action could also prove woefully inaccurate, much to the satisfaction of shareholders.
MGM does face competition, of course.
Wynn and Las Vegas could always muscle in on the action. There’s also DraftKings (NASDAQ:DKNG) and Penn National (NASDAQ:PENN), among others which have solid toeholds into the emerging online sports betting market. Still, with MGM down over 50% year-to-date, brand power, deep pockets, and liquidity to weather Covid’s impact, MGM does have a lot going for it.
Lastly, with other players now wagering on additional red in the stock, buying MGM for ‘slightly better odds’ may be the more bankable proposition.
MGM Stock Monthly Stock Chart
Source: Charts by TradingView
Looking at the monthly price chart, it’s quickly apparent that MGM stock likes to technically play the game by the book. The illustrated view shows that over the past decade, shares have demonstrated a solid knack for reacting strongly to a bullish trend-line tied to the 2008-2009 financial crisis.
More recently and quite bearishly, the casino operator’s stock was repelled by the trend-line as it turned into price resistance, along with a supportive challenge of MGM’s test of its YTD 62% retracement level. Now sporting a confirmed bearish shooting star pattern as well as an arguably weak stochastics setup, others are playing the stock in anticipation of lower prices for the back half of 2020. But is it a sucker’s bet?
The expression “if it looks too good to be true, then it probably is,” comes to mind when looking at MGM too bearishly. That’s not to say I’d be dismissive of the stock’s current positioning. A trend of adhering to the technicals still commands our respect. However, given the company’s business prospects, I’d rather wait on the sidelines until slightly better odds to buy shares emerge.
For like-minded investors, I’d propose waiting for the monthly stochastics to firm up just a bit inside neutral territory. If both lines can begin to spread away from one another, rather than continue closing in on a bearish crossover, today’s bearish shooting star can be viewed more optimistically. In fact, I’d label it a deep and opportunistic pullback into defined Fibonacci support that’s part of a building weekly chart uptrend.
Bottom-line though, to make any future stock positions a stronger bet where an uncertain outcome is always unconditional, I’d highly recommend MGM’s options market for hedging and an intermediate-term collar as one of our favored strategies of choice.
Investment accounts under Christopher Tyler’s management do not own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.