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Bring It On Home

Long-term investing can be challenging when faced with the shadow of inflation.

Bring It On Home

The operative word for investors in 2022 may be redux, meaning bringing back.

It could be 1970s redux if inflation becomes the untamed bear sapping savings and driving down the value of investments.

It could be early 1980s redux if the Fed decides it must aggressively raise interest rates.

It could be 2020 redux if the omicron or some future variant of Covid causes a reimposition of travel restrictions and perhaps at least partial business shutdowns, if not the full lockdowns of two years ago.

Recently, technology stocks of all stripes have been selling off, and most especially those of companies that have no profits, but merely the promise of profits someday. That includes iGaming and sports betting stocks that recently were sky-high as they traded on extraordinary multiples of estimated revenues three and four and five years out, as many have no profits upon which to value them.

If either or both of those scenarios come to pass, it will not make for pretty stock action.

Those who remember the stagflation of the 1970s recall that the 1973-74 bear market was one of the worst and most depressing ever. It wasn’t a crash; it was a grinding down day by dispiriting day.

Of course, the sudden lockdowns of February 2020 set off a panic that shattered consumer discretionary stocks, including gamers, leaving some of them down 90 percent.

For fundamental, long-term investors it can be frustrating as such phenomena become the overwhelming determiners of the direction of stock prices.

But for the patient, fundamental investor, dislocations that have little or nothing to do with the intrinsic value of a company present buying opportunities.

That may be especially true in gaming. The reality is that gambling will be here after inflation subsides and long after the present Covid pandemic is a distant memory.

Well-run companies with reasonable debt structures will survive to enjoy good times and to take advantage of speculative competitors demolished by the powerful, though ephemeral, economic forces.

Let’s use Penn National as an example. In early 2020, the stock was selling in the mid-to-upper $30s. Then Covid struck. PENN plunged to an intraday low of $3.75 on March 18, having lost 90 percent of its value. Today, even after its roller coaster ride of the past year largely because of fickle investors in online gaming and sports betting, the stock is in the upper $40s. In other words, the opportunistic investor who bought at the bottom is enjoying a greater than 1,000 percent profit. The long-term investor not shaken out of the stock by Covid fears still enjoys a profit of 30 percent or more in less than two years.

PENN is an extreme example, but is representative of the trend in gaming stocks during and since that time, both among casino companies and suppliers.

The opportunity if inflation and/or Covid create a bear market is perhaps best expressed by Warren Buffet’s famous advice to be fearful when others are greedy and greedy when others are fearful. Anyone who bought gaming stocks in March 2020 can attest to the wisdom of those words.

The advice as to where to invest during inflation is almost universal: companies with pricing power, those with hard assets such as real estate and those that pay dividends.

Casino stocks score on pricing power. If people want to gamble, they will sit at a $25 blackjack table as well as a $10 table. Those who play a 91 percent payback slot machine will play a 90 percent payback machine, by and large.

As mentioned here before, gaming REITs satisfy the hard assets and dividend payout standards. And as Gaming and Leisure Properties and VICI Properties demonstrate with their latest transactions, the companies are finding ways to grow. Indeed, as part of those real estate acquisitions, both are positioning themselves to benefit beyond rents as GLPI partners with Cordish Companies’ future growth of its Live! properties and VICI prepares to invest up to $1.5 billion to finance Hard Rock International’s plan to remake the Mirage.

Another old line is that demographics are the future. The population of Las Vegas is rapidly growing, and that is unlikely to slow in the foreseeable future. Several companies—Red Rock Resorts, Golden Entertainment, Boyd Gaming— benefit from that demographic growth. It also helps that they have embedded value in the real estate they own.

Those companies have also experienced leaders who have demonstrated their ability to execute on their business plans.

That brings us to another favorite line from Buffet about bear markets: Sometimes, the market puts America’s best companies on sale.

If a bear market does come, there won’t be a need to search for speculative growth stories. Just look for profitable companies with proven management executing prudent growth strategies and whose stocks are selling at bargain prices.

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