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Volatility Happens

While investors have seen Macau's stalwarts on a roller-coaster stock ride, the market's fundamentals are solid.

Volatility Happens

My, what a volatile ride for the two biggest American casino companies by market value, Las Vegas Sands and Wynn Resorts.

LVS rose 75 percent last year and continued to go up into the new year, then plunged 9.2 percent in a couple of weeks. WYNN had an even steeper roller coast, up 81 percent last year and also hitting a new high in January, then plunging 11.1 percent before regaining its footing.

One word explains both 2013’s magic run and 2014’s volatility: Macau.

Investors simply got giddy in the final four months of last year as Macau  gaming revenues continually beat estimates. Indeed, two other American-listed Macau operators soared even more: Melco Crown by 132 percent and MGM Resorts 103 percent, though MGM was helped mostly by a Las Vegas recovery and an improving balance sheet.

So, assuming the January swoons were just a temporary light-headedness, the extraordinary increases of last year still beg the questions: How far can they run? When does the run stop? Are they setting up investors for a big fall?

First, a couple old Wall Street bromides, each offering opposing advice:

• You can’t go broke taking a profit.

Any investor who enjoyed all or most of the run-up can sell today at a big profit and walk away safe from any future sell-off.

• Stocks that run tend to continue running.

Not only is it true that momentum holds until something happens to change it, but there are strong fundamentals in Macau that the analysts cited together almost like a Greek chorus. Among the factors:

• Revenue growth in the mid-teens;

• Development of adjacent Hengqin Island bringing tens of thousands of vacationers next door;

• Opening of the big new ferry terminal this year, bringing in more gamblers;

• The 2016 opening of a bridge connecting to Hong Kong and the Chinese mainland; and,

• Little new capacity over the next two years.

Not only did analysts raise targets, some dared look further into the future than the usual 12 months to see even higher prices.

Jon Oh of CLSA, for example, raised his target on WYNN to $235, but said the stock could reach $280 to $300 when its Cotai resort opens in two years.

That wouldn’t be bad for a stock that just over a year ago was $107.

So, what’s an investor to do? Stay away from stocks that have run so far so fast? Jump on the bandwagon and enjoy the momentum ride? Here’s where some more old Wall Street wisdom comes in.

For current shareholders who’ve enjoyed big profits, an often-used formula is to sell part of a position, thus protecting the initial investment while staying in for the rest of the ride. Another approach is to look at the stock market as a leading indicator. Because investors are focused on what business will be like six or 12 months down the road, there can be some comfort in staying in, or buying now, figuring underlying business trends are supporting the stocks.

However, that assumes one knows when those underlying trends will change, and that stocks aren’t priced so high that, to once more employ an old Wall Street saying, the good news is priced into the stock.

Finally, here are two of our own observations:

• Macau isn’t likely to quit booming for some time. That should continue to support growth in stock prices. A key will be to look at valuations—price to earnings, enterprise value to EBITDA, price-to-earnings growth.

If they start getting ahead of the growth of the underlying business, or well beyond historic norms, that will be a signal to start easing back, or even out.

On the other hand, really long-term investors have got to love the growth stories that LVS, WYNN and MPEL represent, not to mention the commitment by Wynn and Las Vegas Sands to return signficant capital to shareholders.


Internet Gaming: Less than Meets the “i”

By now, the less-than-stunning startup of internet gaming in Nevada, New Jersey and Delaware is well known. Likewise, there appears to be no rush of states to join the pioneers, at least not this year.

As many know, we have long cautioned that iGaming would be an evolution, not a revolution, in the U.S., and that stocks that doubled and tripled in anticipation of online gaming are set up to disappoint.

Now, we expect interactive gaming to ramp up as more players register, player acquisition programs kick in, technology glitches are resolved, geolocation services improve and more banks and credit card companies agree to process transactions.

And no doubt other states will legalize, and eventually iGaming will lead to some nice profits for operators and providers such as 888 and bwin.party.

Our point: This is no gold rush, and investors looking at brick-and-mortar companies entering this space would serve themselves well with cautious expectations.

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