Bulls and Bears in the Casino Space
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Right now, investors are hyper-focused on the debt ceiling, the big jump in bond prices, and every other macroeconomic challenge…
We are long-term investors. We want to buy into big-money trends.
And I see a lot of interesting opportunities in the gambling sector. Let me explain.
With people moving past COVID-19, I anticipate a big rebound in the gambling industry. But I have to know which companies have momentum and which do not.
Today, I want to talk about a pair of companies that represent each side of that coin.
Problems in China
Jim Chanos is one of the most iconic hedge fund managers in the industry. He is famously a bear. He takes direct aim at companies that he expects will suffer. And right now, he’s shorting Wynn Resorts (WYNN) into the ground.
The thesis is pretty brilliant. You see, Wynn Resorts generates a massive amount of money from Macau, China, the gambling center of the world’s second-largest economy. I’ve noted before that Macau is experiencing a huge shift in sentiment due to the Chinese government.
That government has been hostile to technology and education companies over the last year. Alibaba Group (BABA) stock is off more than 50% from its 52-week high. But the gambling sector is the next industry in the government’s crosshairs.
Chanos believes that Wynn Resorts stock is going to fall from current levels of $85 to the mid-$40s. The reason: Wynn must reapply for its gaming license in Macau in June 2022. Given the hostility that China has shown to the West over the last year, it’s possible that Wynn will lose its license. Any significant concessions that Wynn makes will be detrimental to the price of the stock. Chanos is smart to get out in front of this move.
As I’ve said before, avoid Wynn Resorts for now. It’s not just my opinion, but it’s also what TradeSmith Finance is saying as well. There is a big warning that says the stock is in the Red Zone and is experiencing a momentum downtrend. In addition, the stock has a high-risk VQ of 43.7%, which signals heavy volatility and the possibility of even greater losses in the months ahead.
Buy This, Not That
So, if we’re bearish on Wynn Resorts, we want to avoid the entire gaming industry, right?
A recent report from Macquarie Research details the expected growth of the sports gambling sector. The report says that the ongoing mergers between sports gaming operators and media outlets will generate an extra $30 billion per year by 2030.
“The once disparate categories of online gaming, media and sports are joining teams to create powerful partnerships that we believe will grow viewership, increase overall fan engagement, and drive significantly higher market values for all those connected,” Macquarie wrote in January.
The report reveals this trend via the following:
- Bally’s and Sinclair Broadcast Group finalized a deal.
- There was a deal between gaming outlet Flutter Entertainment and FOX.
- There was another deal between PointsBet and NBC.
- DraftKings and Caesars Entertainment have partnered with ESPN.
- Penn National Gaming has done a big deal that will allow it to outright purchase Barstool Sports in the future.
- There’s a deal between BetMGM and Yahoo.
- And Turner Sports has done deals with daily fantasy sites in FanDuel and DraftKings.
That last company is the stock that really stands out in the sports gambling space.
DraftKings (DKNG) is not in the buy zone of TradeSmith Finance right now. But it’s a stock that we must add to our watchlist, as it entered the Yellow Zone just last week (Sept. 28).
The company is engaged in an aggressive expansion. It generated revenue of $600 million last year, and forecasts from company executives show expected revenue of more than $1 billion this year.
But it’s not profitable. At least not yet.
But keep in mind that when it comes to aggressive growth, a lack of profit is the model to building market share.
I want you to think about how Amazon and Tesla operated. It took years for both companies to show a profit. They sacrificed profit to grow market share, and now are leaders in their respective industries of e-commerce and electric vehicles.
DraftKings appears to be following a similar path.
I’ll dig deeper into this company and trend on Friday.