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Gaming Catches a Cold

Coronavirus clobbers gaming stocks. So what’s next?

Gaming Catches a Cold

Events are moving fast as the fear of the coronavirus and its economic consequences are causing major damage to U.S. stocks—most especially, those in the gaming, leisure and hospitality industries.

While the major indices were down 10 percent or 11 percent since around February 20 as of this writing, U.S. gaming stocks fared far worse, down 30 percent, 40 percent and even nearly 50 percent through the first week of March.

Dining, traveling and gambling face a double-whammy of trouble. The reasons are obvious:

  1. Engaging in those activities is purely discretionary, unlike the need to buy groceries or manufacture cars or houses, and,
  2. People gathering together is the way COVID-19 spreads.

The market reaction may change by the time you read this. Stocks might have found a bottom, or even rebounded somewhat. It’s possible the bottom might have fallen out.

One term that’s gaining popularity during this time is “rerating.” That’s investor jargon for being unwilling to give the same valuation to a stock as before. It presents its own double- whammy.

The math is simple. Rather than paying 12 times earnings for a stock, investors might now be willing to pay only 10 times, or eight or seven. And as earnings fall, the impact, obviously, magnifies. Twelve times a dollar in earnings leads to a $12 stock price. Eight times 50 cents in earnings leads to a $4 stock price.

The scenarios for how COVID-19 will work out are varied.

A mild scenario is that the virus follows others like influenza, and runs out of steam as the weather warms. In this case, disruption is temporary, and most business recovers as postponed events are rescheduled, and consumers experience a pent-up demand for recreation and entertainment.

A middling scenario has COVID-19 continuing to grow, but with society finding ways to cope until it runs its course and/or a vaccine is found.

The severe scenario could be likened to the flu pandemics of 1918 and 1919, though this time with crippling economic impact, given today’s interdependent global economies.

There can be endless scenarios in between.

Only two things are certain:

  1. All scenarios are pure speculation.
  2. This, too, shall pass.

The second point is the only one that investors can address—what to do to survive until the stock market and economy get through the crisis, and how, if possible, to actually take advantage of lower prices.

The first step is simple: become conservative. Get off margin. Avoid or get out of derivatives. Build cash.

The stories are legendary. They come out of every economic depression. They come out of every stock market collapse. They are about the conservative investor who didn’t run up debt to buy stocks and derivatives and try to time the bottom, but accumulated cash and, when the bottom came, was positioned to take advantage.

Look at 2008 as the most recent example.

Many fortunes were lost by people who thought they were deep-value investors buying homebuilders, for example, at historic lows, only to get wiped out as stocks went from low to infinitesimal.

But when the bottom came, those who had been patient grasped a once-in-a-lifetime opportunity. In gaming, that meant the opportunity to buy Wynn under $20 a share, or Las Vegas Sands under $3, which is less than its current dividend.

Of course, there’s no way to know when the bottom has been reached until it’s fairly well in the past.

What can be known is which companies have strong balance sheets and defensive businesses that will allow them to ride out any storm.

Those who have run up big debt are vulnerable if business drops off, and lower EBITDA puts them into at least technical default on that debt.

But, just as individuals who are conservative can both ride out the economic storm and even take advantage of it, so can companies with sound businesses and strong balance sheets. In those cases, lower stock prices can present opportunities.

For individuals, and perhaps even for institutional investors who have cash available, there’s always the opportunity to apply dollar cost averaging—continuing to buy stocks on a schedule, regardless of price.

Again, the math is simple. If a stock is $100 a share, buy one share for $100. When it drops to $50, buy two shares, giving you three. When the stock returns to $100, you will now have three shares worth $300. Thus, you will have made a 50 percent profit on your $200 investment, even though the stock price didn’t grow at all from your initial purchase. If the stock doesn’t decline but continues to grow, you grow with it.

Combining a steady approach with an eye for dividends and total return can be even more significant. It’s worth noting that gaming REITs, while also selling off, have fared much better than casino operators and suppliers, as investors take some comfort in their relatively safe rental streams.

Finally, remember as we head into an unknowable future that the great flu pandemic of 1918 and 1919 was followed by the Roaring Twenties, and one of the greatest bull markets of all time.

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