4 Casino Stocks Gambling on a Stir-Crazy Public

Casino stocks have had an impressive run. Since the beginning of 2020, the VanEck Vectors Gaming ETF (NASDAQ:BJK) gained 27%.

In the context of this market, that perhaps doesn’t sound like much. The Nasdaq composite, for instance, is up over 46% over the same stretch. But brick-and-mortar casinos of course have been shuttered in most cases by the novel coronavirus pandemic. One would expect selling pressure more akin to that has faced cruise operators and airlines.

That hasn’t happened. In fact, U.S. casino stocks in fact have done better than the industry ETF suggests.

BJK has been weighed down by China-focused plays Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN). Both stocks are negative since the start of last year. But including BJK’s direct stakes in their Chinese subsidiaries, the two companies account for more than 16% of BJK’s current holdings.

The catalyst is simple: the legalization of sports betting. Investors are taking the long view, and betting that the pandemic will drive increased legalization — and thus increased revenue. Since going public in April, DraftKings (NASDAQ:DKNG) has been one of the market’s best stocks. And more traditional casino stocks too have done well on hopes they will get their own share of the pie.

But at this point, a “return to normalcy” looms as a second boost to the group. And it may be more than a return to normalcy. Increasingly, it looks like consumers are going to spend up big once vaccines are widespread and lockdowns end.

Casinos, and casino stocks, would be beneficiaries, making them prime targets for the so-called “reopening trade.” These are four of the biggest potential winners:

  • Caesars Entertainment (NASDAQ:CZR)
  • Boyd Gaming (NYSE:BYD)
  • Red Rock Resorts (NASDAQ:RRR)
  • Golden Entertainment (NASDAQ:GDEN)

Casino Stocks: Caesars Entertainment (CZR)

Caesar's Palace (CZR) in Las Vegas

Source: Jason Patrick Ross/Shutterstock.com

Any reopening trade on casino stocks has to include CZR. The simplest reason is that, thanks to last year’s merger between Eldorado Resorts and the namesake company, Caesars is far and away the country’s largest casino operator. Its footprint includes a number of properties in Las Vegas, as well as regional casinos nationwide.

But there’s a little more to it. Management is impressive. It’s largely the same team that took Eldorado from a family-owned, three-property company to the industry leader in just seven years. That team kept results solid even in a disastrous 2020 by controlling costs and finding ways to drive revenue.

And while other casino stocks — Penn National Gaming (NASDAQ:PENN) is the obvious example — have already benefited from sports betting optimism, Eldorado is taking its time. The pending acquisition of William Hill (OTCMTKS:WIMHY) is a major step, but Caesars still hasn’t monetized its massive database.

So, there’s a “three-legged stool” for the bull case for CZR stock from here. Pent-up demand could drive banner results in 2021 and into 2022. Sports betting success hasn’t yet arrived. And a still-heavy debt load provides upside leverage if and when Caesars outperforms.

It bears repeating: any reopening trade in casino stocks has to include CZR stock.

Boyd Gaming (BYD)

the Fremont Casino (BYD)

Source: Ken Wolter / Shutterstock.com

The core worry for BYD stock is valuation. Shares have doubled since the beginning of 2020, even though the news surrounding the company might not be that good.

Boyd does have some exposure to sports betting and online gambling. For instance, it’s partnering with Flutter Entertainment (OTCMKTS:PDYPY) unit FanDuel in launching online casinos in New Jersey and Pennsylvania. But with the bulk of its operations still in Nevada, Boyd doesn’t have the same relative opportunity online as do the likes of Penn and Caesars.

But as far as reopening goes, Boyd has real potential. Its downtown Las Vegas business has been hammered by the pandemic, as it relies heavily on charter flights from Hawaii. Revenue in the downtown business fell 63% in 2020, but should roar back with a vengeance.

Its local properties could be derivative winners. More visitors and more spend in Las Vegas will mean more money for the city’s casino workers. Some of that windfall ostensibly will be redirected to Boyd properties. And the regional business still drives the lion’s shares of profits and could be in for strong results ahead.

Personally, I’d like to see a bit of a pullback. But a big 2021 for casino stocks should still mean a big 2021 for BYD.

Red Rock Resorts (RRR)

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Source: Shutterstock

Even with a sharp rally after last year’s lows, RRR stock looks like a bit of a disappointment. It’s lagged the sector since its 2016 initial public offering. The acquisition of the off-Strip Palms led to cost overruns and soft results even before the pandemic.

But that past disappointment might set up a future opportunity. Red Rock is not quite a straight play on Las Vegas, given its management contracts with a few tribal casinos, but it’s as Vegas-heavy as any of the major casino stocks.

As with Boyd, a 2021-2022 boom for Vegas should be a boom for Red Rock’s resorts in the state. And with valuation reasonable relative to the sector — thanks in part to RRR being left out of the sports betting trade — there could, and maybe should, be more upside. If an investor thinks Las Vegas is going to go wild over the next 12 months, RRR stock might be the best play.

Golden Entertainment (GDEN)

a woman smiling while using a slot machine in a casino. representing gambling stocks

Source: Maridav/Shutterstock, Inc.

GDEN is a smaller version of the RRR play. Golden, too, is largely focused on southern Nevada, though it has a slot machine route business across that state and in Montana. A property in Maryland offers modest sports betting exposure as well.

Like Red Rock, Golden has a flagship property in the Strat (formerly known as the Stratosphere) on the very north end of the Strip. Like Red Rock, it’s been a bit of a disappointment since its IPO. And, like Red Rock, GDEN can soar if Nevada goes nuts, and investor confidence returns.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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