It might seem ludicrous to recommend a stock a day after it reported an 80% decline in revenue. But that’s exactly what I’m doing with Caesars (NASDAQ:CZR) stock.
The former Eldorado Resorts, whose acquisition of Caesars closed last month (Eldorado took the Caesars name), admittedly had an ugly second quarter. But, of course, that’s no surprise. Due to the novel coronavirus pandemic, all of the company’s properties closed at some point during Q2.
There simply wasn’t much Eldorado and Caesars could do.
However, at this point, what happened in the second quarter simply isn’t all that material. And now, what matters for CZR stock is what should happen going forward.
That said, what should happen going forward is normalcy. It may take some time — even years. But CZR stock is cheap enough, and has big enough upside, that it should be more than worth the wait. And here’s why.
The Best ‘Return to Normalcy’ Play
There is no shortage of cheap stocks in the market that are dealing with short-term pandemic effects. Airline stocks, as measured by the U.S. Global Jets ETF (NYSEARCA:JETS), are down by almost half so far in 2020. Cruise stocks have performed even worse, as Royal Caribbean (NYSE:RCL) is off 61% and Carnival (NYSE:CCL,NYSE:CUK) 75% year-to-date. Other travel and leisure names, along with many brick-and-mortar retailers too have taken a big hit.
Those big losers would seem to be targets for value investors with a long-term focus. After all, this pandemic will end. One of the many biotechs targeting a vaccine will succeed, or a treatment will be developed. And when we finally, fortunately, reach that point, normalcy presumably will return and these battered stocks can rally.
The problem for most of these names, however, is that there are long-term impacts as well. Carnival, for instance, this crisis likely will irreparably affect demand. Airlines face the likelihood of persistently lower business travel as Zoom Video Communications (NASDAQ:ZM) gains more and more adoption.
Thus, the argument that pandemic losers will rally back to past highs falls flat. Simply put, it’s not that simple.
However, CZR stock lacks those concerns. Near-term losses are modest. In fact, the company’s net loss for Q2 was just $100 million. And while the gaming industry likely will be changed, those changes aren’t necessarily going to be negative. For Carnival, the likely end of buffets removes a key selling point. For Caesars, as chief executive officer Tom Reeg noted after Q1, the end of buffets represents a potential source of cost savings.
Meanwhile, gaming demand will return. It’s an activity that has lasted for centuries. And as a result, CZR stock looks like one of — if not the — best “return to normalcy” plays out there.
The Best Gaming Play, Too
To be sure, that case for CZR stock could apply to many other U.S. casino operators as well. However, most of those operators have significantly outperformed CZR stock so far this year.
Prior to the deal with Eldorado, Caesars stock had declined 8.7% YTD, while Boyd Gaming (NYSE:BYD) is down just 14.6% YTD. Churchill Downs (NASDAQ:CHDN), meanwhile, has rallied 18.3%. And Penn National (NASDAQ:PENN) has soared 90%, thanks to its acquisition of a stake in Barstool Sports.
The rallies in CHDN and PENN, admittedly, are driven by optimism toward online gambling and sports betting. Those rallies make some sense, and I’ve recommended PENN since early April.
However, Caesars has a big opportunity there as well. Obviously, the company has a significant presence in Reno and Las Vegas, where sports betting already is legalized. The company also has regional casinos, however, and a significant agreement with U.K. bookmaker William Hill (OTCMKTS:WIMHY).
Investors are rightly focused on the long-term opportunity ahead of Penn and Churchill Downs. But, for some reason, they’re ignoring the opportunity in front of Caesars.
CZR Stock a Long-Term Buy
I don’t believe investors will ignore that opportunity forever, though. It’s too large, and there’s too much to recommend CZR stock even before normalcy arrives.
After all, this had been the best stock in all of gaming before the pandemic arrived. Management is excellent. The acquisition has its risks, but the former Eldorado successfully integrated Isle of Capri and Tropicana Entertainment, acquired in 2017 and 2018, respectively.
Admittedly, the stock may take some patience; we’ll see how investors react to ugly Q2 numbers. But as normalcy returns to everyday life, it should do the same to CZR stock. With the stock down almost 50% from February highs, that suggests a reasonable path to a double. And those are the kind of returns worth waiting for.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.