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Why So High?

Gaming stocks are soaring and there seems to be no end in sight, but how did we get here?

Why So High?

The stock market is high by almost any measure. And every day it climbs higher.

As of this writing, the S&P 500 is selling at 25 times earnings, 3.4 times book value and generating a paltry 1.94 percent dividend yield.

The index has risen 16 percent this year, a prodigious feat but puny compared to the

NASDAQ Composite’s 26 percent rocket ride.

And gaming has made the overall market look like a laggard.

Fantini’s North American Gaming Index is up over 30 percent, and our World Index is up an astonishing 43 percent.

The gains have been remarkable and widespread: Supplier Scientific Games rose 325 percent over its 52-week low, as fellow supplier Aristocrat is up 80 percent and IGT 40 percent. Or take a hybrid supplier like TransAct Technology, 120 percent over its 52-week low.

Regional casino operator Golden Entertainment is up 190 percent, while Eldorado is not far behind at 165 percent. Penn National, Pinnacle, Tropicana and Monarch are all up more than 100 percent and Churchill Downs is at a 52-week high.

Big casino operators are soaring, too: Wynn at 85 percent, Caesars over 90 percent, Las Vegas Sands and MGM Resorts each up 30 percent.

Ditto for international casino operators such as Galaxy Entertainment and Melco Resorts, both over 70 percent from their lows.

Each day brings a pile of stocks hitting 52-week highs, and they aren’t just the familiar names. They range from iGamers like Evolution, Jackpot Joy and LeoVegas to Asian casino operators such as Paradise Co. and Grand Korean Leisure, to Swedish company Kindred to U.K. betting company Ladbrokes Coral and to companies in India, of all places, where casinos hardly even exist, like Delta Corp. on the Bombay Stock Exchange.

Business performance, the economic environment and sentiment seem to support the high prices. In the U.S., for example, the economy is creating jobs by the hundreds of thousands every month and consumer sentiment is the highest since 2004. Jobs and consumer sentiment are often cited as the two most important statistics for the casino industry.

Players are continuing to visit casinos. Gaming revenues in the U.S. rose 3.15 percent through September and growth has accelerated through the year with September itself up 3.4 percent, as reported in Fantini’s National Revenue Report. Macau is back in business as growth there is running at a sustained rate, rising double digits and performing at the best level since 2014.

Perhaps most impressive about Macau is that all three market segments—premium mass, base mass and VIP—are growing, and this despite the government’s ever-stricter rules on accessing cash and greater regional competition from places such as the Philippines, which itself is becoming a significant market.

The result of all of this is a kind of golden age of profitability. Companies across the spectrum and in all parts of the globe are achieving record profits on ever-higher margins as they continue to practice the expense discipline learned during the Great Recession of what is now nearly a decade ago.

Further, they are increasingly buying back stock, initiating and raising dividends, reducing debt ratios and, in many cases, paying down debt. All those actions support stock prices.

Finally, despite their big advances, most gaming stocks, while priced high, are not historically or hysterically high.

PE ratios of 25 times are high, but we’ve been there before; likewise, relatively low dividend yields. And some companies remain bargains by certain measures. Pinnacle and Penn National have enterprise value-to-EBITDA ratios of just over eight times. Boyd has a price-to-growth ratio well below 1. Dividend yields of nearly 7 percent for Gaming and Leisure Properties and 4.5 percent for Las Vegas Sands provide healthy cash returns and promise healthy total returns.

In short, we seem to be in a Goldilocks era.

But, to use one of our favorite expressions, trees do not grow to the sky.

Investors would do well in this environment to look for what can go wrong.

For example, we remain in an era of cheap money. The Federal Reserve Board has been raising interest rates, but at a very cautious pace, continuing to make stocks attractive investments in what could be an asset bubble. And, as we all know academically if not viscerally, all bubbles burst.

The price of oil has been rising steadily, a fact hardly noted by prognosticators. At some point, higher prices pinch consumer spending power.

A shock, whether an exogenous event like war or simply profit-taking gone out of control, could shatter investor confidence.

The economy could grow to the point of labor shortages and subsequent higher wages and inflation that could lead even our most accommodating Fed to raise interest rates and cool off the economy. In other words, the Fed hasn’t repealed, nor has spiffy technology obsolesced, the business cycle.

Bottom line: Goldilocks was a story. All stories end, and this one will, too, sooner or later.

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