Investing is not usually easy because of a multitude of factors. We do homework to improve our odds but in reality there are two choices: Up or down. In rare cases, like with Penn National Gaming (NASDAQ:PENN), the decision is easy. Buy the dips in PENN stock.
These dips are winning opportunities to go long in Penn National.
PENN Stock Delivered Profits and Will Do It Again
In May I wrote about such an opportunity when the stock crashed into its novel coronavirus pandemic low. Back then I suggested that it could rally another 35%. In hindsight it was obvious, but I said that after it had already rallied 300% off the March low. The stock did not disappoint because it actually rallied another 290%. It went from just under $20 to $76 per share. Clearly Penn National has fans on Wall Street — and for good reason.
This virus outbreak decimated the gambling industry. Stocks like this, MGM Resorts (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN) lost 75% of their value in weeks. PENN recovered and beat its February highs already. The other two are still mired 30% and 50% below theirs. The aftermath also created an ongoing global fear of crowds. In theory this should keep a lid on the stock, but instead it made new highs. The problems continue because people now have fewer choices for destination entertainment. The destinations that are open have restrictions. Credit goes to management how it quickly adapted to this new normal.
Responsive Management Is Key to Success
First Penn National’s management raised $600 million in cash to get ready. They continued to align themselves with new ventures for a better future. This is not new because they’ve been at it well before the outbreak. These steps give management tools to navigate the recovery period and the hurdles that arise. After all, the world is not rid of Covid-19. Not by a long shot. Scientists are hard at work, but they don’t yet have a vaccine for it. However, the therapeutics have improved so the mortality rate seems to be dropping. PENN stock should survive the tests ahead of it.
The reality is that people are not gathering in the masses inside anymore. Some gambling sites have reopened but with limited capacities. The cost of operations with new rules and regulations must be huge. Having online income streams is necessary to offset them and the drop in the foot traffic.
The Buyers Are Lurking Below
PENN stock has gone too far and too fast. But that is never a reason to short it. The charts tell the truth and so far the bulls are buying every dip. Not even the correction that hit Wall Street in September could do a lot of damage.
The stock is still above its September $60 pivot. Immediate support is near $62 and there are secondary support zones at and through $50 per share. While this would look like a catastrophe, it would make for normal price action. The rally from the March bottom was insane. For perspective, the 50% Fibonacci retracement level is at $40 per share.
Since this is a wild stock, buying full positions at these levels is a bit reckless but not silly. In the long run it will continue higher for as long as the equity markets are rising. The options markets offer alternatives to buying shares outright. In my write-up from May, I also suggested selling $10 puts as a bullish strategy. Those trades yielded immediate profits and without any out-of-pocket expenses. They were easy bets that didn’t even need a rally to win. The same strategy can happen now, albeit at a much higher level. Someone looking to own PENN stock at a discount can sell the Jan $40 put and collect $1.8 for it. This leaves over 35% of room for error.
Fundamentally it is still unfair to judge the company by the traditional metrics. There’s still nothing normal but its P&L right now. People are still afraid of crowds and social distancing is still in full bloom.
Moreover, this time around, we have new extrinsic factors at play. The politicians are mucking up the investment environment because of their squabbles over stimulus and the upcoming election. It would be wise to breakup the position into tranches. Investors should buy it below $56, or chase the rip above $72. It is entirely possible for PENN stock to break new records and rise another $20 in the next few months.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.