by Barry Unterbrink for HorseRacingFLA
The shares of publicly-traded gaming and horse racing stocks have surged upward nicely this year, far outpacing the general market. We assembled a portfolio of 11 stocks on New Year’s Day and offer our analysis here. Our selections included of course, those companies that operate thoroughbred racing tracks, including: Churchill Downs, Canterbury Park, Eldorado Resorts, Penn National Gaming, and Pinnacle Entertainment.
We’ve noticed that the larger, more established casino and hotel players have suffered more so than the smaller firms. Wynn Resorts, Caesars Entertainment, and MGM Resorts, the big Kahuna’s of the gaming landscape, have all lost share value*. Las Vegas Sands is break-even. Monday, Credit Suisse analyst Kenneth Fong commented on the Macau Gaming sector, noting that the “worst is over” and it is now time for investors to accumulate shares. Our portfolio jumped 2% on the news Tuesday, but gave those gains back Wednesday, and up 1.5% today. Meanwhile, the year to date performance of the smaller players (by market capitalization), are outstanding: Eldorado Resorts, +106%, Isle of Capri Casinos, +119%, and Pinnacle Entertainment, +75%. “Buy the shares, skip the pari-mutuel wagers” may be is the new investment strategy for your discretionary funds.
The smaller operators have ramped up earnings at a faster clip than the big-boys, so that may be a metric that explains their price gains. ISLE, +104%, PNK, +125%, PENN, +70%. Looking at the 5 year sales (revenues) trends, the coin is flipped: Las Vegas Sands, +26%, Wynn Resorts and Churchill Downs, +12%, and MGM up 11%. They have more stable sales trends, and their operating profit margins are more seasoned, in the mid-teens to low 20 percent range. Caesars, in deep trouble with creditors of their bankrupt operating unit, faces many challenges and distractions: the shares have lost 60% of their value so far in ’15.
Pinnacle Entertainment continues to be bid higher, being sought after by Gaming and Leisure Properties. Its bid was raised this week to approximately $47.50 per share. Shares trade now in the $38 range, as the risk arbitragers jockey for position and are aware of the risks of the deal not getting done at the bid price.
In summary, I would not expect huge gains going forward from the small capitalization stocks that have run up quickly this year. The larger players in this space could provide a nice entry point for exposure to the gaming sector – sans Caesars. If you own mutual funds, you may already own a few gaming stocks; check you fund’s holdings on-line or call your advisor.
If you want a bit more safety than picking single stocks, consider the Market Vectors Gaming exchange-traded fund, symbol BJK. It holds 46 stocks, 7 from our test portfolio; two-thirds of the stocks are non-USA domiciled
however. It pays 2.4% in dividends annually. It’s somewhat harder to handicap this ETF, but easy operationally with just one buy order to place. BJK is down 7% year-to-date.
* year to date share performance, dividends excluded.