Stocks across-the-board have made a stunning recovery from last year’s Covid-19 crash lows. But, many sin stocks have seen an even-more stunning recovery. Part of this has to do with the recession-resistant nature of sin stocks. Yet, a more important factor has been the acceleration of two megatrends.
I’m talking about the rise of widespread legalized sports betting across the United States, as well as the marijuana legalization trend. The first trend resulted in gambling stocks soaring well above their pre-pandemic levels. The second trend, more recent, has sent “pot stocks,” which cratered in 2019, back on an upward trajectory.
Those who got in early saw tremendous gains. But now, it’s clear things have gotten overheated. In a matter of months, gambling stocks went from selling for fire sale prices, to reaching multiples that would make even SaaS stocks blush. Cannabis stocks? Since January’s “blue wave” election results, they’ve too become overvalued, as investors overestimate that the still-long shot chances of U.S. marijuana legalization is a near-certainty.
So, as these previously oversold stocks are now overbought, what’s the best move? Candidly, it’s time to quit them, cold turkey. Consider these seven sin stocks ones to sell into strength:
- Canopy Growth (NASDAQ:CGC)
- Caesars Entertainment (NASDAQ:CZR)
- DraftKings (NASDAQ:DKNG)
- Penn National Gaming (NASDAQ:PENN)
- RCI Hospitality Holdings (NASDAQ:RICK)
- Sundial Growers (NASDAQ:SNDL)
- Tilray (NASDAQ:TLRY)
Sin Stocks: Canopy Growth (CGC)
Hopes for 2021 U.S. pot legalization and “meme stock mania” may have helped Canopy Growth stock surge in early February. But now, down more than 40% off its highs, should you follow the crowd and cash out of this popular pot stock?
Admittedly, there’s merit to both the bull and bear case for CGC stock. On one hand, if the Congress fast-tracks legalization of marijuana, and President Biden signs it into law, it’s companies like this one that stand to gain the most. Even before they commence operations in the U.S., investors will bid up this Canada-based cannabis company back toward its prior highs. And perhaps, even higher.
On the other hand, even after its 40% slide, high hopes continue to be priced into shares. Trading for 28.4x its estimated fiscal 2021 (year-ending March 2021) sales, the company will need epic levels of growth in the coming years to justify its current valuation.
Any sort of progress regarding legalization will certainty drive a spike in Canopy. But, with shares still up substantially from before the election, those who sensed potential changes early may want to take profit. Letting it ride could result in a lower exit point.
Caesars Entertainment (CZR)
With both the sports betting trend, and the “recovery narrative” on its side, it’s no surprise CZR stock, which cratered to single-digits at the start of the pandemic, has made a stunning recovery over the past year. Trading for around $6 per share at its lows, Caesars Entertainment shares today change hands at $95 per share.
As capacity limits for its Las Vegas casinos are set to be raised, and its deal to acquire sportsbook operator William Hill (OTCMKTS:WIMHY) is about to close, the gaming giant may be flying high. However, after soaring on both its sports betting and recovery catalysts, shares now trade at an unsustainable valuation.
It’s the same dynamic playing out with Penn National (see below). With the potential for sports wagering to fuel growth, investors have priced both stocks in a similar manner to sports betting app pure plays. When, not if, the bubble bursts, these online gambling-boosted, land-based casino stocks could see a serious price correction.
Going public via a SPAC (special purpose acquisition company) merger last spring, those who bought in to DraftKings after the deal close entered at the right time. Not only was last spring the perfect time to wager on the continued rise of sports betting. The speculative mania over SPAC stocks was in its infancy as well.
The “return of sports” following the lockdowns first drove up DKNG stock from around $11 per share to above $40 a piece. Then, as sportsbook legalization continued across the U.S., investors had more reason to bid up this still-unprofitable sportsbook operator to even higher prices. Even after its recent pullback, the stock is up substantially, trading for around $72 per share.
But, just like the situation with Caesars, investors may be overestimating the long-term value of its sportsbook operations. Sure, as a first-mover, it was already well established, before names like Caesars and Penn started to aggressively move into the space. Yet, while last November I said, despite concerns like profitability and valuation, shares had plenty more runway, today things are looking a bit stretched.
Trading for 26.8x its estimated 2020 sales — and still set to lose money this year and the next — any sort of hiccup could send this 2020 top performer in the wrong direction as this year plays out. As enthusiasm remains high, it may be time to take advantage, and sell.
Penn National Gaming (PENN)
PENN stock is up over 1300% in the past year. And, it’s not because investors are excited its largely-regional casino operations are set for a big comeback. For this gaming stock, it’s all about Barstool Sports. In hindsight, Penn National Gaming’s strategic investment in Dave Portnoy’s sports media empire couldn’t have come a better time.
Why? First, of course, is that the deal gave them a recognizable brand name for their budding sports betting operations. Second, with Dave Portnoy becoming an internet sensation after his pivot to day trading when sports were canceled, he became the face, and unofficial cheerleader, for this previously faceless gaming company.
With both these factors at play, Penn built up the reputation it was on its way to dominate the U.S. sports betting market. And, while it’s far from doing so, investors certainty have priced the stock like that’s the case. Trading for a forward price-to-earnings (P/E) ratio of 45.08, confidence runs high the company will crush expectations.
However, while it certainty has trends on its side, it’s clear retail speculation, rather than its fundamentals, has been the main driver behind the thirteen-fold rally in the price of PENN stock. The madness could continue, following its upcoming addition to the S&P 500. But, just like with other sports betting high-flyers, consider this a name to quit while you are ahead.
RCI Hospitality Holdings (RICK)
“Social distancing” and gentleman’s clubs don’t seem like something that would go together. Yet, after being hammered to deep value prices last spring, adult-focused hospitality play RCI Hospitality Holdings has gone into hyperdrive.
Yes, with revenues set to bounce back to pre-outbreak levels this year, its quick recovery from single-digits, back to around $25 per share was justified. What’s questionable, however, is RICK stock’s dramatic surge from under $30 per share in December, to around $65 per share today.
Sure, the company has big potential with the expansion of its Bombshells restaurant chain, a concept similar to that of Hooter’s. Yet, with its 180-degree turn from being a value stock, as many, like this Seeking Alpha commentator, argued it was in mid-2020, to speculative growth stock, now may be the time to take the money and run.
Enthusiasm for “recovery plays” alone may be enough to keep RCI Hospitality stock up at today’s prices. But, if it starts falling short of expectations, watch out. Expect these shares, one of the top performing sin stocks, to pull back from today’s prices.
Sundial Growers (SNDL)
Firmly at the center of a Venn diagram of “meme stocks, “penny stocks,” and “pot stocks,” SNDL stock has been like catnip for speculators. The pot legalization trend helped to initiate renewed interest at the start of 2021. And, online hype helped send Sundial Growers from around $1 per share, up to nearly $4 per share, in early February.
Since then, much of the madness has cooled. The struggling Canada-based cannabis company trades for around $1.51 per share today. Sure, it looks like a “cheap stock” just based on its share price. But, a closer look at its fundamentals reveals its anything but “cheap.”
How so? For starters, based on valuation, investors have priced it like its one of the higher-quality pot stocks. Even as it’s an “also ran” at best in the industry. Also, it’s clear markets have yet to factor in the affects of massive shareholder dilution. Sundial’s share count has gone up substantially over the past six months.
Sure, legalization progress, and a possible turnaround in its financial performance, could help send it surging toward its recent highs. But, with more smoke than substance, if you got into this name when traded for literally pennies (52-week low of 14 cents per share), it may be time to sell this favorite of the Reddit stock trading community.
Legalization hopes and “meme stock mania” may have helped send Canopy and Sundial stock to unsustainable levels. But, the pot stock that made the most ridiculous moves in February was Tilray stock.
The marijuana company, which is banking on a merger with Aphria (NASDAQ:APHA) to help turn around its unprofitable operations, saw some of the wackiest price moves during last month’s madness. From Feb. 1, through Feb. 10, TLRY stock went from around $20 per share, to briefly hitting $67 per share. However, this spike was short-lived. Shares fell back below $30 per share in a matter of days.
Yet, even after this 60% sell-off, lower prices may be ahead. Sure, the Aphria deal may enable the company to finally turn itself around. But, outside of this, little else has changed when it comes to its prospects. Developments in U.S. pot legalization may help send the shares soaring yet again. Yet, investors have plenty of options out there to play this trend.
Even if you’re bullish on its merger, buying Aphria stock may make more sense, as InvestorPlace’s Vince Martin argued on March 4. With its huge merger “spread,” buying this company’s acquisition target basically allows you to buy this stock at a double-digit discount.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.