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Buy Low, Sell High

Do you wait out the vagaries of the market or do you leap on opportunities?

Buy Low, Sell High

Investors tend to break down to those who take a long-term view of the market-maybe even take on an owner’s attitude and want to grow with a company-and those just itching to trade.

And, while there is frequent-and dare we say endless?-debate over which view is superior, the fact is that both approaches offer opportunity to make money.

We recently were struck by such opportunity when the stock market reacted strongly in different directions to news affecting two very different kinds of companies.

In one instance, Bally Technologies announced that its earnings this fiscal year would be lower than expected because of a variety of reasons, but CEO Dick Haddrill also gave reasons why the long-term prospects for the company remain strong.

By the next morning, the sell-side analysts had taken down their earnings estimates, not just for this year but next, as well. They cut their target prices, and at least one, Joel Simkins of Macquarie, downgraded his rating to neutral.

The result: Bally sold off 5 percent.

But within three days, Bally shares had recovered.

The next episode of violent market reaction came around 11 a.m. one recent Thursday.

The Nevada Gaming Commission had just released gambling revenues for February. The Las Vegas Strip was nearly off the charts with revenue leaping 32.9 percent over last year. What’s more, the improvement was concentrated in baccarat play, a way of saying that casinos appealing to high rollers did killer business.

Put yet another way, Wynn Resorts, MGM Mirage and Las Vegas Sands are the likely beneficiaries, though until they report their first-quarter results, we won’t know which, or what combination of them, benefitted and by how much.

Still, it didn’t take long for traders to react. The stocks shot up, especially MGM. Within an hour, it was up 11 percent. Normal trading volume had doubled by lunchtime.

Whoever was first on the news made quick bucks.

But, like with Bally, the overall fundamentals really hadn’t changed. Take out baccarat and Strip revenue actually declined 2 percent. Slot revenue, a better gauge of business volumes, fell 9 percent.

And part of the big bacc win came from unusually high hold. A lot of big players lost big. Luck can turn. And, over time, hold will fall to normal levels.

In the reaction to Bally’s earnings, only Macquarie’s Simkins among the prominent analysts seemed to pick out a fresh reason to be wary of the stock. The field of suppliers is getting crowded with competitors, and it will become harder to grow market share, he said.

Other analysis focused on slow gaming operations revenue (a result of recession) and softer-than-expected orders from casino companies (another recession effect).

But recessions end. And Haddrill, in his comments, noted the growing pipeline of systems orders (even if some have been delayed), coming gaming expansions in the U.S. and overseas, and the inevitability of the replacement sales cycle turning up.

So, an investor who sold into Bally’s mini-bear missed out on the recovery later in the week, while a trader had the chance to buy on the dip and sell into the rally.

Still, the 5 percent and 10 percent moves are small compared to long-term potential.

Warren Buffett once said his biggest mistake as an investor was trying to save a dime here or a quarter there on a stock price, not buying, and missing out on much greater appreciation as the business grew.

We feel much the same way about reacting to news, though many traders who profited over the volatility would surely disagree.
 

High-End Coupon
A sign of the discounting times in Las Vegas is evident at Four Seasons, of all places.

When handed keys to our car upon leaving recently, the valet also handed a little thank-you envelope. Inside: a $50 coupon for the hotel’s spa and a 25 percent-off dinner coupon for the Verandah restaurant on a weekend.

When Four Seasons starts couponing, you know hotels are scrambling for customers.


Dividends Pay Off
On the supplier side, Shuffle Master has always been a growth company, reinvesting the considerable free cash it generated.

Under new CEO Tim Parrott, the emphasis has been on paying down debt, a pursuit that will free up even more cash in the future. Meanwhile, Shuffle Master is improving margins and expects to grow sales in the upper-single digits, making for even more free cash.

So what’s Shuffle Master to do?

Asked that question at the annual meeting, Parrott talked about the lack of attractive acquisitions right now, then said: “We like the idea of a dividend.”

Given its more mature business lines and more manufacturing-like business model, a dividend may make sense.

It also might make sense for other gaming companies, especially the regional casino operators who, for the most part, are winding down growth projects and might find dividends attractive as debt declines and cash flow grows.

Ameristar is the lone one to pay a dividend today, but Boyd did so not long ago.

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