Casinos, Like Airlines, Are Best Avoided for Now

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The last time I wrote about MGM Resorts (NYSE:MGM) and MGM stock was in mid-June. The company’s Las Vegas casinos were starting to open up and business would soon return to normal. Investors were cautiously optimistic. 

MGM Stock Shows Signs of Life Amid Second Virus Wave Concerns
Source: Jason Patrick Ross / Shutterstock.com

However, since then, it’s become clear the novel coronavirus isn’t going away any time soon. In fact, it might be stronger than ever. As a result, MGM stock has lost its momentum and is struggling to stay in the mid- to high-teens. 

Reopening Hasn’t Been a Slam Dunk

In my June 18 article, I said that given the difficulties casinos would face when reopening their locations — reduced capacities, increased cleaning, security, and labor costs — MGM would likely see some downside as a result. And that’s precisely what’s happened. 

 

For this reason, I recommended investors interested in betting on MGM consider the VanEck Vectors Gaming ETF (NASDAQ:BJK) instead. By playing the field, investors will win once casinos return to normal. Until then, a bet on BJK reduces your exposure to any one company. 

Unlike Amazon (NASDAQ:AMZN), which is a good proxy for consumer stocks, MGM Resorts isn’t necessarily the best proxy for casinos. Who is, I couldn’t say. What I do know is that none of the casino stocks stand out in terms of their ability to withstand Covid-19.

As InvestorPlace’s Brett Kenwell recently stated, MGM stock is a tough buy at the moment. I couldn’t agree more. 

While I like the MGM brand, large gatherings have proven to be effective “super spreaders” during the pandemic. Nevada is reporting record daily highs for Covid-19 cases and now, casino properties, including MGM’s Bellagio and Signature Condominiums, are being sued by employees for unsafe working conditions

Investors hate uncertainty. What could be more uncertain than a virus that’s already killed almost 130,000 Americans? People are scared to go to work right now and that’s especially true in hot spots in the South and Southwest. 

An Alternative to BJK

A possible alternative for anyone who absolutely must make a bet on MGM, and doesn’t want to buy BJK, would be to invest in the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA:RCD). It gives you 61 S&P 500 consumer discretionary stocks, all equal-weighted, and rebalanced four times a year in March, June, September, and December. 

At 0.40%, it’s not cheap, but it does closely track the performance of the S&P 500 Equal Weight Consumer Discretionary Index. For some investors, the biggest downside of RCD is the fact it tends to overweight mid-cap stocks as a result of the equal weighting. For me, that makes it even more attractive, because I see mid-cap stocks as the sweet spot in terms of long-term performance. 

Each quarterly rebalance, the 61 stocks return to a weighting of 1.64%. As of June 29, MGM’s weighting was 1.49%, a sign that it’s retreated since its latest rebalance. Slightly more than half the holdings are currently above 1.64% with Gap (NYSE:GPS) doing the best this quarter with the only weighting over 2%. 

Year to date through June 29, RCD has a total return of -20.01%, less than half MGM’s total return of -49.0%.  

The Bottom Line on MGM Stock

InvestorPlace contributor Mark Hake recently suggested that investors wait and see how MGM’s reopenings perform before taking a bite out of MGM stock. 

“The problem right now is that there is no dividend yield. Investors receive little income while waiting for the stock to recover. Therefore, I would wait to see what the upcoming reopening results will bring. Are the high-end casinos and resorts booking sufficient revenue for the company to turn around?” Hake wrote on June 25. 

With the July 4 weekend coming up, investors should get a better idea of how fast MGM will bounce back. I’m skeptical that people are going to want to be in casinos when Nevada, Arizona, and California are setting record numbers of Covid-19 cases.

If you can’t make the ETF play to get your MGM exposure, I would wait until the fall before considering buying MGM stock. That’s because another significant correction could be in store for stocks over the next two months. If that happens, stocks like MGM will face further downside.

I don’t believe the risk/reward is in your favor at the moment. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

 

    

 

 


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