Gambling stocks have had a solid 2020. That’s certainly a surprise. After all, the novel coronavirus pandemic shuttered casinos worldwide. Traffic in major destinations such as Las Vegas and Macau remains depressed. Many operators had to go to the debt or equity markets this spring to raise capital at often unfavorable terms.
It’s not hard to imagine the casino sector looking something like airline stocks: down significantly this year and still trading near 2020 lows. That hasn’t been the case, however.
The VanEck Vectors Gaming ETF (NASDAQ:BJK) actually is flat so far this year. Even that performance vastly understates the performance of U.S. gambling stocks. About 15% of that fund’s assets are allocated to Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) along with their Chinese subsidiaries. LVS is off 28% year-to-date and WYNN is down 45%; the two companies on their own have provided a roughly five-point headwind to the fund’s performance.
In the U.S., optimism has mostly prevailed, particularly since March lows. While the pandemic is driving significant short-term pressure, investors also see a long-term opportunity. State governments, battered by the pandemic, need to find new sources of revenue. That in turn suggests accelerated legalization of sports betting and online gambling. Indeed, the industry earned several wins on Election Day, supporting the optimism behind the sector heading into the election.
There’s the potential for still more upside ahead, though risks remain as well. Investors willing to take on those risks should take a long look at these four gambling stocks:
- Caesars Entertainment (NASDAQ:CZR)
- Twin River Worldwide (NYSE:TRWH)
- DraftKings (NASDAQ:DKNG)
- Flutter Entertainment (OTCMKTS:PDYPY)
4 Gambling Stocks: Caesars Entertainment (CZR)
A bet on CZR stock largely is a bet on scale and management, along with help from the economy. The “new” Caesars Entertainment is a result of the merger between the “old” Caesars and Eldorado Resorts, a merger which closed in July. By far the largest casino operator in the U.S., Caesars should do well as long as its industry does. And the plan to buy bookmaker William Hill (OTCMKTS:WIMHY) should boost the company’s sports betting capabilities, even if the merger isn’t yet guaranteed to happen.
Though the company kept the name, it was technically Eldorado that was the acquirer. As a result, Eldorado management stayed on. That’s important, because the Eldorado story is one of the most fascinating in the entire market of the last decade.
Just seven years ago, Eldorado was still a private, family-owned, company. It owned two properties (Reno, Nevada and Shreveport, Louisiana) along with 50% ownership of the Silver Legacy, also in Reno.
Then management got to work. A merger with tiny MTR Gaming added exposure to the Eastern U.S. and brought Eldorado to the public markets. Results improved across the board, cash came in, and Eldorado stock soared. In 2017, Eldorado went big, picking up national casino operator Isle of Capri. It followed with Tropicana Entertainment the next year. ERI stock rose more than tenfold over this stretch. The value of the entire business (including debt) rose about 80x.
Eldorado obviously benefited from its leverage and a strong economic recovery. It will need macro help going forward as well.
Still, that history strongly suggests that this is a management team worth following. Add to that the Caesars brand, a massive user database, a national footprint, and iGaming and sports betting tailwinds, and the rally well could continue, even if returns over the next seven years aren’t going to match those of the last seven.
Twin River Worldwide/Bally’s (TRWH)
The huge returns in Eldorado stock have left investors scouring gambling stocks for the “next Eldorado” that can build itself into a regional giant. Century Casinos (NASDAQ:CNTY) is one option, though it’s struggled so far in 2020 moreso than larger operators. At the moment, Twin River Worldwide seems to best fit the bill.
Indeed, Twin River has acquired several properties from the new Caesars, including the Bally’s in Atlantic City. The company in fact is changing its name to Bally’s Corporation (NYSE:BALY) effective Nov. 9.
After starting from a small base in the Northeast, Twin River now is moving into Illinois, Indiana, Atlantic City, and Colorado, among other markets. So far, the company seems to be following the Eldorado playbook, while using the forced sale (due to antitrust pressures) of some of these properties to make acquisitions at attractive multiples.
So far, the strategy hasn’t done much for TRWH stock, which is about flat since it came to market last year via a merger with Dover Downs Gaming & Entertainment. And the core risk here is that Twin River is buying a lot of properties — but not necessarily the best ones. A leveraged owner of second-tier casinos might be at more significant risk if another economic downturn arrives or the post-pandemic recovery is slower than hoped.
Still, the upside is huge if the strategy plays out. Even something shy of the “next Eldorado” could lead to significant upside in TRWH stock.
Personally, I’m still not quite sold on DraftKings stock. The optimism toward sports betting makes some sense, but the question is whether even full legalization creates a market that’s necessarily that big. “Hold” rates (i.e., the percentage of wagers won by the house) generally are about 6.5%. With $330 billion in annual U.S. wagering — $1,000 for every man, woman, and child in the country — still only creates a market with about $21 billion in annual revenue. That’s a reasonably big pie, but one that needs to be divided among online operators, casino partners, and suppliers like GAN Limited (NASDAQ:GAN).
The huge rally in DKNG stock from a $10 merger price to above $40 thus seems like it could have run too far. But a recent pullback gets valuation to a bit more reasonable level. And risk-loving investors in the gaming sector simply have to keep DKNG on their radar.
The company seems likely to be the #1 or #2 operator in most, if not all, of its markets thanks to a massive daily fantasy sports user base and a “first mover advantage” in many key states. Having used the sportsbook product in Illinois, I can say it’s top-notch.
Investors who share some skepticism toward the size of the market and a still-high valuation might look for a pullback. For more aggressive sports betting bulls, however, DKNG is something close to a must-own at this point.
Flutter Entertainment (PDYPY)
Another way to play online gambling is Flutter Entertainment. Flutter owns FanDuel, which has lagged DraftKings in daily fantasy but often led it in the most profitable sports betting and iGaming verticals.
Flutter also has a sizeable, and profitable, business in the more mature European market. Its Paddy Power brand might be the Continent’s best, and recently acquired PokerStars dominates that market worldwide.
That breadth does have a downside. Owing to FanDuel’s still-small size relative to the rest of the business, U.S. online gambling simply can’t have the same impact on overall valuation as it can for a pure-play like DraftKings. On the other hand, country-specific risk is lower, and Flutter still has scale benefits to capture internationally.
With strong management and strong brands, Flutter stock is something close to a “set it and forget it” play in a sector that has very few such plays.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.