Betting long on shares of Penn National Gaming (NASDAQ:PENN) has been a profitable strategy in 2020. But in today’s market, investors might want to pay attention to what the bears are saying and doing, before placing that next “over bet” in PENN stock.
Penn Gaming has its share of bearish critics. Right now that amounts to 16.82 million shares or roughly 12% on PENN’s float. It’s not the most vilified publicly traded company. That honor goes to brick-and-mortar retailer GameStop (NYSE:GME). Inovio Pharmaceuticals (NASDAQ:INO), Macy’s (NYSE:M) and Bed Bath & Beyond (NASDAQ:BBBY) are also well-known companies whose stocks register more strongly with today’s market skeptics.
Nevertheless, Penn’s short interest is on the heavier side of stocks finding unusual attention by investors seeking to profit from lower share prices. By comparison and to add a bit more emphasis, PENN’s bear population is even slightly higher than hotly contested SPAC and EV play Nikola (NASDAQ:NKLA), which sports short interest of around 9.50%.
So, what’s behind all the shorting in PENN stock and an investment approach many view as the domain of more sophisticated investors? It could have something to do with Penn’s outperformance in 2020, which has occurred largely on the back of its well-publicized, app-based sports betting partnership with Barstool Sports.
Shares of Penn Gaming are up 154% on the year. And from its March novel-coronavirus-induced low struck during Wall Street’s short-lived but ferocious bear market, PENN stock is up a staggering 1,600%. Plausibly that could open the door for some froth. Shares are now tenuously valued as a large-cap stock at just over $10 billion. And unquestionably the stock gains in 2020 allow for opportunistic stock dilution and access to the capital markets as September’s near $1 billion secondary at $61 a share supports.
The bearish posturing from investors could also reflect what analysts at Deutsche Bank recently voiced while reiterating a sell recommendation on shares. The firm denounced Penn’s lofty valuation and sees “little to no progress in passing laws that might advance the online gambling sector” as further problematic. That’s not all though.
Deutsche also warned that PENN’s total addressable market is likely smaller than bullish forecasts suggest and competitive threats from within the industry exist. While no names were given, DraftKings (NASDAQ:DKNG) and MGM Resorts (NYSE:MGM) are obvious challenges. And it would be naïve to ignore casino operator Wynn Resorts’ (NASDAQ:WYNN) move to get a piece of the action in a market with a low barrier to entry.
PENN Stock Daily Price Chart
Source: Charts by TradingView
Some of Deutsche’s concerns raised resonate with me. However, the firm’s finger-pointing towards inexperienced day-traders and institutional investors chasing momentum to create “an internet meme of sorts” in the stock sounds like crying over spilled milk. And it’s not far-fetched to think the firm’s mocking of PENN stock is meant to distract from a harsh reality. That’s especially true with Deutsche only raising its painfully, low price target of $22 to an inadequate $31 a share that’s still well-removed from a fairly ordinary looking uptrend.
Technically, and for bears like Deutsche, there is some evidence PENN can move lower. Since the firm’s early October reiteration, the stock has weakened and in the past three sessions broken a pair of intersecting support lines. It could be the start of a more menacing price cycle. And given stocks of Penn’s caliber routinely correct by up to 30% and trend support lies from roughly $49 – $57, it appreciably makes sense to play defensively.
One means for investors to maintain upside exposure, while severely limiting downside risk in the event of a larger selloff is to use Penn’s options to create a spread combination with this type of dual functionality. One such favored strategy that fits in well with what’s been discussed is buying the Nov $75 / $80 call spread and selling the Nov $55 / $50 put vertical for even money.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.