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Roller Coaster Ride

What to do when faced with erratic markets and a major war

Roller Coaster Ride

The stock market has been a wild ride for months now, led by the crash of the so-called meme stocks with DraftKings being the most notable such name in gaming.

Much of the market’s volatility has resulted from manic-depressive reactions to every tidbit of news and speculation about inflation and its old friend in angst, the future of interest rates.

Now, we have a major land war in Europe with dangerous saber rattling by the Russians about possible escalation into a nuclear conflagration.

So, what’s an investor to do?

For traders and short-term investors, there is plenty to do, from trying to capitalize on soaring oil and commodity prices to rushing in search of inflation hedges to buying wartime stocks like arms manufacturers to sticking one’s head under the pillow and hoping all the crises go away, as the Covid pandemic appears—cross our fingers—to be doing.

But for long-term fundamental investors, the plan is much simpler: proceed as always finding and buying good companies at good values.

There are two likely results from the Russian invasion of Ukraine: 1) civilization will be destroyed by nuclear holocaust, or, 2) this, too, shall pass.

In case of the former, deciding what to do is moot. In case of the latter, it’s a pretty safe bet that society will continue on, though perhaps in a new Cold War environment that would favor defense industry stocks for a considerable time.

So, let’s assume that the Ukraine crisis passes, leaving behind a reasonably familiar and normal world.

For the near future, there will surely be disruptions. Those will include already recognized problems: high energy costs, the worsening of supply chain disruptions, and perhaps an economic war resulting in higher prices and greater shortages of commodities beyond oil and of food. Remember, Russia is the source of a large number of raw materials used by American industry as well as gas and oil for Europe, and it and Ukraine are major wheat exporters.

But all of those risks and worries aside, the underlying U.S. economy appears to be strong, and people are increasingly in a mood to let loose and spend on entertainment. And that means spending on casino entertainment, whether on the gaming floor or in restaurants and showrooms.

Almost all of the recent data points to such free spending, and that data includes gaming revenues.

From our perspective, the best places in which to invest continue to be the domestic casino

industry.

Gaming technology and equipment manufacturers are likely to benefit from growing casino spending, including companies like Everi, whose fintech services ride the wave of higher gaming revenues.

Likewise, technological change such as going cashless is an incentive for casinos to buy new games and systems.

However, the manufacturers will still have supply chain issues to navigate.

There is growing confidence that Macau casino operators can look forward to a prosperous future as new gaming concession rules are likely to avoid draconian restrictions, and Covid will go away.

However, optimism should be tempered with the understanding that the Chinese Communist Party is anti-gaming and, over time, will limit the industry. The days of looking at the vast mainland China population and extrapolating nearly endless growth from that are over.

Indeed, it is not out of the range of possibility that Macau gaming will shrink over time.

American casino operators are positioned to enjoy the new Roaring Twenties that can be expected from a strong economy combined with pent-up demand from consumers eager to escape the Covid era and whatever economic difficulties result from the Russia-Ukraine war.

And the best positioned casino companies are those that cater to local players. They aren’t subject to the risks of travel restrictions, weakened convention business, absence of international visitors and consumers cutting back vacation budgets if a recession does come.

One risk many regional casino companies do face is new competition. However, there are companies that have growth opportunities, as well.

As examples: Churchill Downs is building a historical horse racing machine empire in Kentucky. Red Rock Resorts and Golden Entertainment enjoy southern Nevada’s population boom. Century Casinos’ acquisitiveness should be rewarded with economies of scale. Full House Resorts has enough growth projects to increase profits several fold. Monarch Casino is generating so much cash from its Black Hawk, Colorado expansion that it soon will be debt-free.

The big regional casino companies have another advantage—large numbers of proven customers in their databases who reside near major league sports cities, thus providing a great opportunity to capitalize on the spread of legal sports betting, and at reasonable marketing costs. Companies that fit this profile include Caesars, Penn National and Boyd.

Finally, discussion of the attractiveness of regional gaming as investments in this uncertain time must include the gaming REITs, VICI Properties and Gaming & Leisure Properties.

They own appreciating real estate, have tenants that have proven to be rock solid, can in many cases raise rents with inflation, enjoy geographic diversification and pay hefty dividends.

So, the glamour may be in the multibillion-dollar resorts of the Las Vegas Strip and Macau, but the safest investments in turbulent times may be the companies that operate closest to their customers.

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