Trade of the Day: Las Vegas Sands (LVS)

Stock Recommendation: Buy LVS below $50 per share targeting $55-60 before March.

Options Alternative: Buy to open LVS March 2013 $49.75 calls for $3.00 per share or less.

This week we saw good news from casinos in Macau. Revenues in December hit a monthly record and analysts are already upgrading growth expectations for 2013. There are challenges in the region, however, with new regulations about smoking and a potential Chinese crackdown on the larger gamblers; but there is plenty of reason to be optimistic. Macau is a foothold into the very large and potentially profitable Chinese market and the source of significant profits for U.S.-based gaming companies.

Gaming revenue in Macau is expected to hit $38 billion, several times larger than in Las Vegas. The industry has lagged a little this year because gaming companies are very sensitive to economic uncertainty and news from China has been much less optimistic in 2012 than it was in 2010 and 2011. That issue, combined with growth concerns in the U.S., has certainly created some headwinds for Las Vegas Sands (NYSE:LVS) and others, which seem to be grossly oversold. Despite record revenues and growth, gaming companies remain well under their 2007 highs, giving much more potential to the upside. If investors play their cards right, the payoff could be large.

There are a number of companies to choose from in the sector but we like Las Vegas Sands best because they have positioned themselves more strongly in the mass market than Wynn Resorts (NASDAQ:WYNN) or MGM Resorts (NYSE:MGM), which are stronger with VIPs. We like the opportunity to invest with Macau’s “Wal-Mart of gaming.” The mass market may have thinner margins but it is a larger source of growth.

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From a technical perspective these companies all look very similar. The breakout above resistance this week is occurring on decent volume and a bounce off short-term support. In the case of LVS, the rally also coincides with an inverted head and shoulders continuation pattern. These are very compelling entry opportunities despite the fact that gaming stocks have already rallied.

Normally we expect a breakout like this to extend beyond the neckline to a point at least equal to the depth of the pattern, which was about $7 for a target of $55 per share. However, in our experience, an inverted head and shoulders continuation pattern like this tends to exceed that more conservative target by an additional 10-15%. If momentum still looks good at $55 we recommend moving that price target to $60 per share.

The second price target in this case is at last April’s prices, which occurred after a resistance breakout similar to today’s. While the past isn’t a perfect predictor of the future, it’s a “gamble” we are willing to take. Like any stock, there are issues to consider before opening a trade in a gaming company. They tend to be much more volatile than the market averages and many of them (including LVS) were on the verge of bankruptcy only a few years ago.

We should note at this point that, depending on the charts you are looking at, the pattern on LVS may look a little different than the one pictured above because of a special dividend in December. Our chart is dividend adjusted — which is the standard — but not all charting applications have caught up on these special payments.

A similar series of special dividends were paid in 2010 and we have studied the impact on those stocks that paid those dividends over the next 3-6 months. For those that were in an uptrend prior to the dividend there was a strong tendency for that trend to continue. Investors seemed less likely to take profits from a stock that had just distributed such a large payment. We feel that should also work in our favor in this trade.

We would expect volatility to remain relatively high on LVS in the short term, which means stop losses should be generous. Short-term traders may consider a half-size position in the stock, considering the amount of general uncertainty in the market over the next two months as the Fiscal Cliff remains in the headlines. This is a trade where a long option position may make more sense than a stock trade because of the greater control over capital at risk.

Because we expect the trend to complete in the short term, we don’t believe there is much benefit in buying a lot of time in the option. Traders who choose to use a long call for this trade rather than a long position in the stock may prefer the lower $55 target.

Stock Recommendation: Buy LVS below $50 per share targeting $55-60 before March.

Options Alternative: Buy to open LVS March 2013 $49.75 calls at $3 per share or less for a $7 target

John Jagerson and S. Wade Hansen are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

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