Gambling stocks were among the biggest losers of the sell-off in February and March. With the novel coronavirus pandemic shutting down casinos worldwide, the declines were hardly a surprise.
The rally off those lows, however, might be. The VanEck Vectors Gaming ETF (NASDAQ:BJK) has gained 135% off its lows — and even that understates the sector’s strength over the past ten months. Multiple gambling stocks, whether casino operators or suppliers, have tripled or better from their lows.
Given the gains, it might seem like the sector is a bit too hot, particularly with lingering effects from the pandemic. But there’s a case for at least a few gambling stocks to continue to rise in 2021. Sports betting and iGaming legalization in the U.S. should continue to expand. Normalcy will return at some point as Covid-19 vaccines are distributed. There’s still room for an economic recovery — and likely quite a bit of pent-up demand from gamblers.
At this point, investors probably do need to pick and choose. But those still willing to bet on the sector (pardon the pun), here are four potential candidates, each with a very different bull case:
- DraftKings (NASDAQ:DKNG)
- Las Vegas Sands (NYSE:LVS)
- Scientific Games (NASDAQ:SGMS)
- Churchill Downs (NASDAQ:CHDN)
Gambling Stocks: DraftKings (DKNG)
As far as gambling stocks go, there isn’t a better growth play than DKNG stock. Flutter Entertainment (OTCMKTS:PDYPY) owns rival FanDuel, but most of its business is in more mature poker and European iGaming markets.
DraftKings, in contrast, is a pure-play on U.S. sports betting and online gambling growth. The massive base of existing daily fantasy sports users provides exceptional opportunities for cross-selling. The pandemic is expected to accelerate legalization at the state level, given the loss of tax revenue and the increase in spending on social services.
As is the case with basically every growth stock in this market, valuation is a bit of a concern. A $20 billion market capitalization prices in an awful lot of success for a company still years from posting even a modest profit.
A 25% pullback from early October highs does help the case from a valuation perspective. And DraftKings believes it can clear $1 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) in a few years’ time. If that forecast pans out, the rally in DKNG stock should resume.
Las Vegas Sands (LVS)
There really aren’t a lot of value plays among gambling stocks, but LVS stock probably qualifies.
To be sure, the stock doesn’t look cheap at first glance. It trades at 40x the consensus 2021 earnings per share estimate. But gambling stocks usually look expensive on a price-to-earnings basis, owing to high depreciation. And, of course, those 2021 estimates are depressed by both the pandemic and lingering impacts of the trade war on Las Vegas Sands’ properties in Macau.
The concern here, however, is that LVS has looked some sort of cheap for some time — yet hasn’t done much. In fact, the stock trades about where it did during the first half of 2013. Shareholders have received attractive dividends over that time, but LVS has badly lagged the market, let alone the best plays in the sector.
Still, this does look like one of the more attractive “return to normalcy” plays out there. That’s true not just in terms of the pandemic, but potentially U.S.-China relations as well. And with so many gambling stocks looking rather expensive, a reasonable valuation and possible resumed dividend could lead to a nice rally.
Scientific Games (SGMS)
Gambling stocks historically have been high-risk, high-reward investments. The combination of cyclical exposure, never-ending competitive concerns (particularly in the U.S. as new states have ‘cannibalized’ border properties elsewhere), and high levels of financial leverage usually leads to quite a bit of volatility.
But even by the standards of the sector, SGMS stock stands out. The company accumulated significant debt years ago in acquiring slot manufacturers WMS Industries and Bally Technologies (almost immediately after Bally itself had acquired Shuffle Master). It’s still dealing with those borrowings, which totaled $9.5 billion at the end of the third quarter.
That leverage has put SGMS stock on quite the roller coaster, from below $10 in 2016 to over $60 in 2018 and then back again by March. Of late, the roller coaster has headed in the right direction, with the stock more than quadrupling from its lows.
Even after those gains, the company still has a market capitalization under $4 billion, which leaves potential upside if SciGames finally can deliver. It hasn’t done so in terms of profits for years now, but with a reasonably large sports betting business and new casino development boosting slot sales, it could be set to do so.
If SciGames finally does deliver on its potential, that leverage will amplify the stock’s gains. If, however, the company stumbles again, history will repeat.
Churchill Downs (CHDN)
Personally, I’m not sold on CHDN stock, and haven’t been for some time. But I’ve been wrong for basically that entire period. Churchill Downs has been one of the best and most consistent winners among gambling stocks.
Qualitatively, there’s still quite an attractive case. The Kentucky Derby alone has massive value, thanks to a lucrative TV contract and steady revenue growth thanks to higher sales of premium experiences. TwinSpires is one of the leaders in online horse racing (which is legalized at the federal level).
Churchill has been an effective acquirer and operator of brick-and-mortar casinos. And its entire portfolio should set the company up well for online sports betting via its BetAmerica brand.
Once again, the concern is valuation. Even on a sum-of-the-parts basis, it’s difficult to fully support a market capitalization near $8 billion. But, for years now, CHDN bulls have done well by focusing on the quality of the business over the exact price of the stock. That trend may well continue.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
