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Ups & Downs

Investing in gaming stocks has always been a roller coaster ride, and this year is no different

Ups & Downs

As the perhaps apocryphal story goes, a young investor, nervous about his holdings, approached JP Morgan and asked what the stock market will do.

“It will fluctuate,” the great banker pithily replied.

Apparently, JP Morgan foresaw gaming stocks.

Many gaming stocks have been on a rollercoaster ride this year, rising and falling on takeover speculation and announcements, with severe weather dampening business, worries about U.S.-China trade, etc.

Yet for all the volatility, as of this writing gaming stocks generally have been stable to up. Fantini’s North American Index of a dozen casino companies and their suppliers is up 12 percent for the year, with some names, such as Everi (plus 88 percent), takeover target Caesars (plus 72 percent) and Churchill Downs (plus 49 percent) having big runs.

The World Index of 23 American and international casino companies, suppliers and interactive companies is up marginally, though with a healthy 16 advancers, including NagaCorp up 32 percent and Aristocrat 30 percent.

But turn back the pages of the calendar for a longer view, and the roller coaster has had drops and climbs that would cause the most ardent thrill-seeker to hesitate before riding.

Often, stocks rise or fall based on business trends. Macau casino operators are a clear example. In 2014, when it seemed that Macau was some sort of otherworldly place where revenues would skyrocket forever, stocks reflected the giddiness.

Las Vegas Sands hit $85, Wynn $249, and Galaxy HK$78 in February of that year. Then the Chinese government cracked down on government corruption, including many officials who spent public money heavily at the baccarat tables, and revenues plunged, taking stocks with them. Before it was over, LVS sank to $38, Wynn to $53 and Galaxy to under HK$20. The other Macau casino stocks mimicked the pattern.

Today, with LVS around $54, Wynn $108 and Galaxy HK$47, an investor can look back and see where prices could go again.

This past year has seen stocks that became investor darlings sink sharply when they disappoint. Golden Entertainment and AGS are two examples. When Golden acquired American Casino and Entertainment and laid out a plan to turn the properties around, investors bid up the stock from around $8 to $34. When it became clear that the turnaround would take time and near-term earnings fell below expectations, the stock collapsed almost to $12.

AGS likewise was a story of premature and too-great optimism. The stock IPO’d early in 2018 at $19 and shot up over $30 as investors took to the small company with big ambitions of entering numerous new markets armed with slot games loved by players. Then, when AGS stumbled, investors panicked. The stock sank 50 percent in one day.

Yet Golden and AGS largely remain the same growth stories they were before. Both stocks have come back a bit from their lows, and investors now have a chance to buy them at a fraction of their former costs.

Interestingly, the biggest gaining stocks of this year have all gotten there by being proven growth stories.

Everi, under the guidance of CEO Mike Rumbolz, has gained momentum both on its slot machine side and its fintech side. It seems a long time since the stock seemed forever mired down and the company seemed to be in a commodity payments business.

Churchill Downs (CHDN) has been perhaps the least noticed growth story. Under CEO Bill Carstanjan and with a veteran COO in Bill Mudd, CHDN has steadily diversified into casino gaming while growing the Kentucky Derby franchise and its online account wagering business, which also positions CHDN in the emerging online betting industry.

Aristocrat has had a long run of gaining market share by focusing on game development and on the world’s biggest market, North America.

NagaCorp is a company few Americans know, but one that has had long successfully executed its growth plan, which has mainly been to use its casino monopoly in Phnom Penh, Cambodia, and to build NagaWorld into a destination resort.

One relatively new category for gaming investors offers a smoother ride—the gaming REITs, which rely on steady rental revenues from geographically diversified casino operators such Penn National and Boyd Gaming. And the REITs pay significant dividends: Vici properties yield 5.5 percent, MGM Growth Properties 6.3 percent and Gaming & Leisure Properties 7.4 percent.

Of course, as much as fundamentals, growth strategies and management execution matter, there is the element of timing: knowing when to get in and when to get out.

Perhaps the most dramatic example was Las Vegas Sands. The stock peaked around $133 in September 2007 when investors were at their bullish peak. Then the financial collapse hit, and the Great Recession followed. LVS sank to $2.28 a share by February 2009.

Lots of other stock followed the same pattern, which brings to mind another JP Morgan quote: “I made a fortune getting out too soon.”

On the other hand, anyone brave enough to buy at the bottom had the chance to ride LVS up past $85 in 2014, or to hold onto now when the annual dividend of $3.08 a share is greater than the stock price at its nadir. That means the intrepid investor who saw past the dark days of the Great Recession, in effect, has been paid to buy the stock.

Or, to close with a quote from a great investor of our age, Warren Buffet: “Be fearful when others are greedy, and greedy when others are fearful.”

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