Yesterday travel stocks took off like a rocket on news that Russia had approved the first Covid-19 vaccine in the world. The news caused a relief rally on Wall Street. In addition, we learned of good news along the Macau front, which goosed the casino stocks up over 5% this morning. One standout under-performer was MGM Resorts (NYSE:MGM). While Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) were up more than 7%, MGM stock fell .7%.
Although worrisome, this is not yet an indication of specific problems, but rather dynamics in its chart.
The whole industry is still crippled by the crisis and their stocks are down more than 35% year-to-date when the S&P 500 is up 5% and near its all-time highs. The long-term thesis for the hospitality industry is still recovering from the shake-up that the quarantine caused. These companies were all successful until the day governments decided to shut the world down.
This indeed is a self-inflicted wound and it is proving difficult to stop the bleeding. Yes, parts of the world are reopening, but not without hiccups along the way. Regardless, there is no doubt that this is going to be a long slog back to normal since we don’t have a full picture yet for the future.
MGM Stock Is Still Searching for the New Normal
Fear of infection is still too high so we won’t be back to pre-Covid travel levels in a while. Yesterday’s excessive celebration in hotel and casino stocks raises some concern. Perhaps investors are too eager to recover the stocks way ahead of company operational metrics. Rising too fast should bring stints of disappointment for those who chase the herd. Don’t get me wrong — I am still bullish on most of them long term, but I caution against chasing them blindly as they approach their resistance levels.
Today I aim to shed some light on the areas on the MGM stock charts that could cause a pause. It is also important to know what levels would make for better entry points and how to trade them.
First, having resistance on the chart should not bring the MGM bulls who are in it for the long term to sell their shares. The thesis for being optimistic remains intact. This is a purely technical set of comments that more often than not hold true.
The virus crisis has created stock winners and losers and this bunch are recent winners among the losing bunch. We acknowledged that they are still lagging the indices by a mile. MGM stock is 250% off of its Covid-19 lows and 50% higher than its last rally base. The bulls have done a great job defending the bottom and establishing a secondary band of support above it around $15 per share. But the last rally came too fast and hit a wall near $24 per share. This resistance will remain there until they can technically break through it, at which point it becomes a trigger for a massive rally.
More Upside Possible This Year but It Won’t Be Easy
I suspect that this will be easier said than done, meaning the trip higher from here won’t be as easy as the bounce to it. Current MGM investors can wait it out because the trajectory is still constructive.
The bulls are buying the dips and they are establishing higher-lows in the process to attack the roof. Eventually they will break through it overshoot higher. New entrants into MGM stock, especially if for shorter-term opportunities, should wait for the breakout above $23.80. This would be the technical trigger that would invite more momentum buyers, and the target then would be near $30. Else it’s best to wait and buy the dip just above $18.
The options markets offer cheaper ways of participating to the upside then buying MGM stock outright. Instead of buying shares, investors can sell puts below current levels for the opportunity to buy shares at a lower price. In return they get paid today and don’t even need a rally to profit.
For example, I can sell the $18 December put and collect $1.80 for it. This trade wins even if MGM falls 15% from here. Compare that with buying shares and hoping for a rally while putting my money at risk right here right now.
The Fundamentals Are Murky but There Is Value
The fundamentals on MGM are in limbo because their profit-and-loss statement is in complete shambles to no fault of their own. It currently shows a 5x price-to-earnings ratio and a .77 price-to-sales. These are extremely low levels but they may not tell the truth.
Suffice it to say that it’s not bloated by traditional valuation metrics. Travel is still but a fraction of what it was last year. The TSA still reported 70% fewer daily screenings than last year. As people get more comfortable being around others, the recovery ramp should re-accelerate. For now it has hit a plateau.
Most airlines are doing a good job of putting travelers at ease while aboard their planes. People will eventually go back to vacationing. Last month I took my holiday and traveled overseas, but among my group of friends and family I was the exception, not the rule.
More of us are opting for staycations and renting RVs instead of going to destination hotels. But eventually the Covid-19 threat will abate, especially after we get a viable vaccine. The experts promise us that it’s a matter of when not if, so I will give them the benefit of the doubt for now.
Patience Is a Virtue
I recognize however that it is going to be longer than anticipated. Meanwhile, companies like MGM will have to deal with the new normal for a bit longer. And that’s another reason why I don’t recommend rushing into MGM stock on huge pops like this.
MGM stock rallied 45% in under a week, which is way too fast, especially since the company is still bruised and battered. Patience is key and eventually Wall Street will flock to hospitality and leisure companies like they used to.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
