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Landcadia Holdings II Isn’t Insulated from the Coronavirus

On paper, the case for Landcadia Holdings II (NASDAQ:LCA) can go either way. Right now, everybody is focused on the dramatic surge of the novel coronavirus. Obviously, this doesn’t bode well for the special purpose acquisition company that will eventually become Golden Nugget Online. However, rising infections also means the likelihood that people will stay at home, the so-called staycation. Cynically, that could boost sentiment for LCA stock.

Image of a laptop surrounded by gambling paraphernalia.
Source: Stokkete/ShutterStock.com

Further, Landcadia released third-quarter results that should encourage optimists. According to iGamingbusiness.com, “Gross gaming revenue for the three months to 30 September came to $28.9m, almost double the $14.9m generated in the third quarter of 2019. After gaming taxes, its net revenue came to $25.9m, up from $13.5m in the prior year.” Further, Golden Nugget owner Tilman J. Fertitta stated the following:

We are very pleased with yet another quarter of profitable growth. Our pandemic-proof business model keeps showing its resilience in New Jersey and we look forward to expanding operations in Michigan.

On the surface, we have many strong takeaways that could embolden bulls toward LCA stock. Primarily, with gross gaming revenue nearly doubling on a year-over-year basis, this metric quantifies Fertitta’s claim that Golden Nugget benefits from a “pandemic-proof business model.”

Bad Timing?

However, what doesn’t encourage prospective buyers is LCA stock itself. Despite the positives, shares have been downright ugly since the second half of September. And that could be due to timing misfortunes.

Critically, the three months ending Sept. 30 really covered the optimistic phase of our new normal. Yes, coronavirus infections peaked during the summer season around mid-July. Since then, however, cases have declined significantly. As well, during this period, multiple sports leagues either reopened or were initiating their seasons.

Basically, you had two encouraging developments: society was getting healthier overall and Golden Nugget’s key consumer market – online sports gambling – appeared back on the recovery trek. Likely, this is why LCA stock soared. But it’s crumbling now because those tailwinds aren’t present.

LCA Stock Faces Covid-19

If you’re interested in taking a shot with this casino, the market trajectory will largely depend on how the pandemic plays out. Frankly, I don’t want to make too hard of pronouncements here because again, this could go either way. Yes, daily cases have soared to record levels. At the same time, the healthcare infrastructure is applying lessons learned, as evidenced by some mitigation in death rates.

LCA stock vs. Covid-19 cases
Click to Enlarge
Source: Chart by Josh Enomoto

Interestingly, LCA stock and new daily Covid-19 infections share an inverse relationship. True, the correlation coefficient doesn’t feature the strongest magnitude (approximately -58%) but it’s still within a statistically significant range. Fundamentally, the inverse correlation makes sense – higher Covid-19 cases translates into potential negative impact for sports and the economy.

Therefore, the smart idea here is to wait out LCA stock. Though shares did pop higher following the Q3 results, they’re still in a technical downdraft. This downdraft probably won’t be broken merely by strong numbers during a fortuitous phase in this crisis.

Politics May Play a Role

Moreover, politics could play a significant role in determining where the pandemic goes from here. As is obvious to everyone, President Donald Trump and former Vice President Biden have different philosophies regarding the pandemic. Without pushing for greater mitigation efforts, an administration that takes a “looser” approach to this crisis could result in negative health outcomes.

Please note that I said could. I don’t think anyone can say for certain which leadership protocol will best address the pandemic. But on that note, having a raging pandemic probably isn’t great for the economy. And that’s another heated issue for the upcoming election.

Further, clinical professor of finance David Kass at the University of Maryland’s Robert H. Smith School of Business noted the following in an email to InvestorPlace:

Although former Vice President Joe Biden is planning to raise taxes on high income earners and corporations, he is also planning to spend more to stimulate the economy by assisting those who were hurt by the lockdowns and overall reduction in economic activity induced in response to the coronavirus. Additional investment and spending on infrastructure should create many jobs. An easing of tensions with our trade partners in Europe and with China, including the reduction or elimination of tariffs, should lead to a substantial increase in international trade and improved economic well-being for all countries involved. The stock market should do well over time as President Biden’s economic policies will result in greater stability in both domestic issues and international relations.

Again, on paper, this seems a convincing argument for Biden. However, we really don’t know who will win the 2020 presidential election. You never want to discount Trump’s enthusiastic base, which is why LCA stock is a tough call.

60/40 Chance of Further Downside Ahead

Although Fertitta claims that his business is pandemic-proof, I believe he is conflating fortuitous timing with fundamental resilience. Don’t get me wrong – lockdown measures are theoretically supportive of LCA stock due to the underlying online gambling factor. But earlier in this crisis, people had more money. Now, I’m almost certain that they’re getting increasingly desperate.

While recent weekly jobless claims are encouraging, the Wall Street Journal warns that “In total, more than 20 million Americans are still receiving unemployment benefits through regular state and emergency programs.” Further, the WSJ notes that “Anecdotal evidence—companies big and small announcing plans to lay off more workers as the pandemic persists—suggests the labor market recovery will be protracted.”

This is not a good time to be playing around with online gambling. In addition, with the broader markets taking a hit, this may discourage gambling-type behavior overall. Remember, rookie investors joined stock trading platforms like Robinhood at a remarkably fortunate time. But everybody’s Gordon Gekko until they start taking serious losses.

In other words, we have a mountain of variables about to careen into the broader discretionary consumer sector. At the very least, you’ll want to wait out LCA stock until after the election results come in.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/is-lca-stock-insulated-from-coronavirus/.

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