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Diamonds in the Rough

A few companies show the way to succeed in a flat market

Diamonds in the Rough

As this is being written, we have closed out the first quarter of 2024 and are waiting on companies to report earnings and provide guidance into a balance of the year that follows a period of optimism for gamers, fueled by the recent strong Las Vegas special events calendar.

Some of that bullishness has since been tempered by severe winter weather that hit some regional markets and reports from other consumer discretionary companies such as retailers that suggest consumer spending is softening.

This follows a period when the major market indices have hit record highs in part thanks to the manic run in some names because of investor exuberance over the prospects for artificial intelligence.

Meanwhile, gaming stocks have missed the party.

Most have been listless in recent weeks, even given the upbeat talk about Las Vegas. Gamers are not alone. Most small stocks, using the Russell 2000 as the proxy, have been down to flat.

One could look at the malaise and infer that it reflects an unhealthy top-heavy stock market that is ready to fall over once the AI mania dissipates. Certainly, worries about inflation, geopolitical risks, soaring government debt, and maybe investor complacence, are cause for at least some nervousness.

One way to look at it is that gamers and other small caps aren’t out of sync. It’s the big caps, and most notably the relative handful riding the AI bronco, that are out of sync.

Regardless, gamers have been basically flat, and now we are left with the reality of casino operators having to deal with higher costs and uninspiring regional brick-and-mortar casino revenues. At least sports betting and iGaming revenues continue to grow, though they are concentrated in just a few names like DraftKings and FanDuel, and sportsbook operators are trying to cut costs to finally achieve profitability.

In the past, investors could look at mergers and acquisitions to unlock value. That isn’t happening so much now. For example, IGT and Everi are both down around 20 percent since their merger was announced.

The companies that have been outperforming recently are familiar to readers of this space. They are MGM Resorts, which has a sensible step-by-step growth plan, the possibility of some big home runs like a New York City-area casino license, and a continually improving balance sheet.

Likewise, Red Rock Resorts and Churchill Downs have clear growth strategies and records of executing on them. Even the stock of beaten-down Full House Resorts has shown recent life, perhaps as some investors pencil out the positive impacts their new Colorado and Illinois casinos are bound to have even if they don’t fully achieve their potential.

On the gaming tech side, Light & Wonder continues to demonstrate that growth in profit and in market value are possible for companies that have their act together. And little AGS keeps plugging away, improving in almost all regards, just needing investors to catch on.

All of which gets us around to the calendar as it moves towards another earnings season, and one in which management teams will have to discuss the sober realities of 2024. No more Covid or Covid rebounds, no more of the novelty of online sports betting and iGaming divorced from profit-focused management, no more one-time headline events that Las Vegas hasn’t seen before.

Now is when companies with leadership, credible paths to growth and proof of execution will stand out.

Loose Thoughts

Invited to the party: It was a clear positive signal to Macau casino operators that MGM Resorts CEO Bill Hornbuckle was among the 20 American CEOs recently invited to meet with China President Xi Jinping.

The purpose of the meeting was to send the message that China is open for business. Including MGM clearly conveyed that the national government is supportive of the Macau gaming sector.

The opposite message has recently been sent to Chinese citizens who go to foreign countries to gamble, and that may be more chilling to casino operators and would-be gaming developers in the Philippines, South Korea and elsewhere in Asia.

The closing of the Tropicana leaves only the Flamingo and Sahara (and, technically though not materially, El Cortez) as the last of the Las Vegas Strip resorts that date back to the days of silver-dollar jackpots, the mob, Elvis Presley, showgirls and, of course, the Rat Pack. And those megaresorts of today bear faint resemblance to their original motel versions.

My own personal nostalgia for this lost era dates to the early 1990s when I made my very first investments in gaming stocks, Harrah’s (now through several ownership changes, Caesars) and then-Tropicana parent Aztar.

I remember my first trip to Las Vegas to visit these properties. The entrepreneurial spirit of the city was inspiring. Being able to stay in, and walk through, casino properties was such an easy way to get firsthand knowledge that Wall Street couldn’t match. That visit led to further investments—the Rio, Station Casinos, life-changing Shuffle Master, and then others over the years.

It also led to a midlife career change from newspaper executive to e-publisher of gaming investment news and data and to, today, being a full-time investor still focused on gaming.

Through all of those years, one thing hasn’t changed—the entrepreneurial spirit of an industry and a city built to entertain.

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