When the novel coronavirus came along, it was an anomaly in the investment world. Never before had we dealt with such a situation, one in which Penn National Gaming (NASDAQ:PENN), along with countless other stocks, was rocked. PENN stock suffered a peak-to-trough decline of 90%, providing investors with one heck of an opportunity. That opportunity didn’t come without risk, though.
We don’t usually get too many opportunities in the market to buy huge dips. When they come, they tend to be spaced out by several years. But because PENN stock and so many others collapsed in March 2020 then soared to unbelievable heights, it’s my opinion that we’re getting another opportunity here as stocks continue to trade in wide ranges.
Shares of PENN topped out on March 15, roughly two months ago, at $142. Since then, the stock has seen a decline of 38.2%. Despite the stock suffering such a large decline 14 months ago, that was in a rare combination of liquidity concerns and a halt in the way we live. The situation is far less dire now, though.
The Best of Both Worlds
PENN is about to enjoy the best of both worlds. Just before the world spiraled into a coronavirus-fueled tailspin, Penn made a sizable investment in Barstool Sports. It now owns a 36% stake in Barstool and has warrants to eventually gain majority ownership down the road.
Between its new Barstool assets and its push toward online gaming, Penn National Gaming has found itself in a favorable position for growth.
There is a secular trend occurring in online sports gambling, allowing many traditional casino operators to cash in on a new and growing revenue stream. As individual states open up and legalize sports gambling and online gambling, these previously untapped revenue streams are flowing right to these companies’ top lines.
Barstool should make for an attractive marketing asset when it comes to online sports betting. Combined with Penn National Gaming’s traditional gaming business, this is a lucrative long-term growth avenue.
However, this is where the best of both worlds collide.
With the U.S. enjoying strong vaccination momentum and the trends for Covid-19 moving lower, the country is looking at a return to normal. Airport traffic is recovering, hotel occupancy is climbing and visits to Las Vegas are surging.
The coming “reopening” boom should yield tremendous results for PENN and its peers. It should also lead to strong growth. For instance, consensus expectations call for roughly 50% revenue growth this year and nearly 150% earnings growth. In 2022, earnings per share estimates call for more than 25% growth to $2.83.
Despite many investors’ true but ultimately meaningless criticism that “PENN stock rallied more than 3,500% off its lows to the recent high,” the reality is that shares trade just 30 times forward earnings expectations.
That may not be bargain-bin cheap, but it’s not absurdly expensive either.
Breaking Down PENN Stock
Too many investors get caught up on what’s happened in the past and don’t focus on what’s happening right in front of them. They’re looking in the rearview mirror instead of what’s through the windshield.
Yes, Penn National Gaming stock collapsed 90% in a month. It was crushed in March 2020 on worries that its balance sheet was too weak for the company to survive. That liquidity concern arose as current liabilities outweighed current assets. It also came at a time where the economy was coming to a screeching halt and cash flows were evaporating.
In hindsight, it was an overreaction, but the concern was very reasonable. However, management ended up raising capital, alleviating those concerns. That led to an insane 3,600% rally over roughly 12 months. That rally is part of the problem for those that can’t look past it. They see a 3,600% gain and simply say, “how much further could it go? It must be a sell.”
However, if we measure from the pre-Covid-19 highs, PENN stock has enjoyed a much more reasonable rally of 260%. At the recent May low, shares were up “just” 87%. Now let’s not try to skirt reality with these numbers. Penn National Gaming has still been a tremendous performer and a dip was warranted.
With that said, volatility has cut both ways over the last 12 months, and we’re seeing the stock still trying to settle down a bit. That’s great for investors, as it leads to increased stability and opportunity.
I like PENN stock right here, right now. I think it’s reasonable to initiate a long position.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.