Penn National Gaming (NASDAQ:PENN) is loaded with potential, but it also has short-term headwinds. As Penn stock has come roaring back to life, it’s given bulls a new aura of confidence. However, it also makes it difficult to chase now.
It’s no secret to many investors that Penn has been one of the best performers as of late. Shares are up more than 700% from the lows, despite being well off the recent highs.
How can investors trade such action? Let’s take a closer look at Penn to see what opportunities — and risks — could be lingering around the corner.
A Return to Normalcy
Shortly before the pandemic took hold, Penn made an investment in Barstool Sports. That $165 million investment gave Penn a 36% stake in Barstool, with the option to increase its position to a 50% stake in three years following another $65 million investment.
However, the novel coronavirus soon kicked off a massive selloff in the stock market. Penn stock was obliterated, falling from $40 to under $4 in less than a month.
These are not the types of moves we see on a regular basis. This stock took a 90% haircut in just a few weeks, paralyzing even the best investors. The declines were happening so quickly that the fundamentals were clearly out the window.
Penn’s problem was the balance sheet. Simply put, as world economies halted, sporting events went offline while gaming and leisure closed down. Suddenly Penn found itself burning cash and in a position where current liabilities outweighed current assets.
Penn turned things around, though. The company shored up its balance sheet. At the same time, the stock market caught a massive bounce off the lows — a bounce that continues months later. As the economy began to reopen, even more momentum fueled Penn stock higher.
What do investors do now?
I like Penn stock, but feel as though we must wait for a dip. As the sports worlds get going again and as traveling, casinos and gaming all pick up, Penn has potential. So too does Wynn Resorts (NASDAQ:WYNN), MGM Resorts (NYSE:MGM), and others.
However, they all have risks.
Risk Present in Penn Stock
The risk here is that the second wave of coronavirus is enough to either stifle gaming and travel, or it’s enough to force a second wave of lockdowns.
I personally do not believe that a virtually nationwide shutdown is back on the table. Based purely on how the public is responding to the current situation — that is, a record number of cases — they do not seem like they will be very receptive to another shutdown.
That said, risk for lower attendance and a possible stock market correction could be enough to weigh on Penn shares. In that case, I’d love a shot at Penn stock near $20.
The hope is that we can get Covid-19 under control. Whether that’s through a vaccine or higher mask adoption or some other means. If that’s the case, calendar Q1 could be a big one for Penn and other gaming stocks.
Remember, we didn’t have March Madness this year. The NHL and NBA also suspended their seasons, while the MLB has delayed its season for months now. If we are “all systems go” next year, Penn, Wynn, and MGM should have a monster first half in 2021.
The comps during this period will be incredibly easy to top and could act as another catalyst for a higher stock. I really like this name for the long term, but wouldn’t mind a correction in the short term.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.