At first glance, the novel coronavirus posed an unprecedented threat to Penn National Gaming (NASDAQ:PENN) and its stake in Barstool Sports. With the disruption of sports leagues globally, the case for PENN stock absorbed a massive hit. Further, with the consumer economy seemingly on the precipice, the idea of placing wagers on gambling-related investments seemed incredibly foolhardy.
However, what followed the March doldrums was an exercise in pure contrarianism. Forward-looking investors recognized that for PENN stock, the Covid-19 pandemic was exactly what the underlying business needed: a free marketing opportunity. Namely, with traditional, high-contact entertainment options wiped off the board, online (and contactless) solutions suddenly became viable.
As the Wall Street Journal noted, many workers who found themselves performing their jobs from their living room took to the stock market to channel their inner Gordon Gekko. Further, public health reports suggest that for a small subsection of the populace, the Covid-19 crisis may have substantially accelerated gambling behaviors.
Cynically, this is a net positive for PENN stock. However, in order to make the sentiment stick, Penn National — along with rivals like DraftKings (NASDAQ:DKNG) and Golden Nugget Online Gaming, which is merging with Landcadia Holdings II (NASDAQ:LCA) — needed sports to come back. During the initial onslaught of the pandemic, that seemed unlikely.
Fortunately, though, professional and collegiate leagues eventually returned to the field of play, albeit with severe restrictions. More importantly, there is some evidence to suggest that we’re getting used to the new normal. For instance, when new daily coronavirus cases spiked during the summer, that didn’t derail PENN stock. Instead, shares steadily moved higher beyond its consolidation phase as cases began to decline.
Still, with Covid-19 infections having reached absurdly high levels, it’s fair to wonder if the sports-gambling sector is at risk. If you’re a conservative investor, you may want to observe Penn National from the sidelines. Here’s why.
For PENN Stock, All Eyes Are Back on the Health Crisis
According to data from the Centers for Disease Control (CDC), the seven-day moving average for daily coronavirus cases hit just under the 153,000 mark on Nov. 15. For context, there are many countries that don’t even have 153,000 cases total yet and have already raised the alarm.
Of course, if the death rate hasn’t gone up accordingly, there may not be the incentive for leagues to shut down again. While we’ve been fortunate to avoid the fatality bullet so far, our luck may be running out. Again, on Nov. 15, the seven-day moving average for deaths was 1,206.
Back in the beginning of this month, the average was 826 deaths. Therefore, in a little over two weeks, the average death rate jumped 46%. Reasonably, you have to assume that without serious containment measures, average fatalities will continue rising, perhaps near the level we saw back in April.
Not surprisingly, PENN stock has seen volatile and choppy trading since approximately mid-October. That was around the time when it became clear that the second wave experienced in Europe would not be exclusive to that region. Therefore, it’s not out of the question that sports leagues may be forced to severely curtail their seasons, which wouldn’t be great for online gaming platforms.
But even if sports continued to move forward, my next question involves the resilience of the consumer economy. Sure, the Robinhood stock-trading app phenomenon proved that people had money to spend on speculative ventures early in the crisis. But do they still have disposable funds today?
According to a consumer trends report by JungleScout.com, the answer might not be a resounding yes. One of the key takeaways from its data is that 61% of consumers are worried about their current financial situation, up from 56% in May.
Furthermore, one in three Americans say they will decrease overall spending until the end of the year. And one in four will spend less on holiday shopping this year. What I found really alarming is that 21% of consumers will buy essential items (we’re talking groceries and toiletries) as gifts this holiday season.
You have to pause and consider what I just said: people’s paradigms have changed to the point that they might gift each other toilet paper during this holiday season! If you think that’s a risk for PENN stock, you’re absolutely right.
No One Imagined We’d Suffer This Much
Throughout this crisis, I made sure to help local small businesses as much as possible. Of course, you can’t avoid some of the big names. But for take-out dining, it’s been 90% small business. I figured I would do my part until the winter, when I hoped the infection curve would have flattened.
Sadly, the curve is the exact opposite of flat. As well, some of the small businesses where I spent my dollars have now closed their doors. Honestly, I think very few anticipated that we’d suffer this much for so long.
Eventually, the magnitude of the crisis could come knocking on the sports leagues that make PENN stock thrive. But even if it doesn’t, I’m not sure the consumer economy is healthy enough to sustain this much damage.
With two major variables working against the online gambling industry, you may want to avoid the present choppiness of PENN until we get some clarity. I’m not suggesting that Penn National is a bad investment. But when the pandemic has gotten this out of hand, you have to respect the damage it can potentially cause.
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.