The majors hog the spotlight, but smaller casino stocks offer the performance
If you didn’t know any better, you would think the entire complex of casino stocks is about to crumble. Industry heavy-hitters Wynn Resorts, Limited (NASDAQ:WYNN), MGM Resorts International (NYSE:MGM) and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) all absorbed heavy losses last Thursday. The following Friday, major casino stocks enjoyed a reactionary recovery. There was only one problem — the scope of the rally was comparatively limited in magnitude.
In technical analysis parlance, an inside day pattern occurs when the total range of a trading session falls within the range of the prior day’s session. This usually signals indecisiveness, but it depends on the context. According to Investopedia, “If an inside day is found at the end of a prolonged downtrend and is located near a level of support, it can be used to signal a bullish shift in trend. Conversely, an inside day found near the end of a prolonged uptrend may suggest that the rally is getting exhausted and is likely to reverse.”One of the gauges of market stability is how quickly a traded asset can bounce back from a severe drop in value. The more robust the rally, the likelier it is that investors will consider the volatility of a one-off event. But a pensive rally would engineer the opposite sentiment. While I wouldn’t classify the rally in casino stocks as weak, they did chart an “inside day” pattern.
It’s a risky proposition for big casino stocks considering the latest rumblings from gambling mecca Macau. The local government introduced restrictions on mainland China-issued ATM card withdrawals, limiting daily transactions to either 5,000 patacas or 5,000 Hong Kong dollars. Effectively, the new law clamps down on the outflow of money. Gamblers have been known to arbitrage currency fluctuations through previously unmitigated ATM transactions.
Although the scope of the restrictions were less severe than anticipated by Wall Street analysts, major casino stocks still took a good sized beating — even considering Friday’s upside swing. The main problem isn’t so much what Macau is doing; rather, famous casino stocks are levered to fundamentals that don’t directly impact them.
Instead, a better solution is to pick out localized and lesser-known outfits. These names not only have better growth potential, but they’ve simply bypassed this Macau fiasco. Here are three casino stocks that no is talking about — but should!
Casino Stocks to Buy: Century Casinos, Inc. (CNTY)
Headquartered in Colorado Springs and far away from the glitter of Las Vegas, Century Casinos, Inc. (NASDAQ:CNTY) is fairly unassuming compared to giant casino stocks.
For example, CNTY has a little over 1,300 employees — a mere fraction of what MGM and its peers employ. Nevertheless, don’t let the size of Century Casinos fool you. It’s got quite a reach, with operations in their home state, Canada, Aruba and Poland. It also has gaming facilities in luxury cruise liners.
In fact, because of its size, CNTY has more room to grow. That’s fairly evident when you stack its financials against the major casino stocks. In the past ten years, annual revenue growth averaged 11%. Compared to MGM, this rate drops to less than 4%. Additionally, MGM’s sales growth in the past six quarters is in the red. Century Casinos is simply more appealing at a quarterly rate of nearly 8%.
Of course, this is all statistical granularity unless it actually translates into shareholder profits. This is where things really look good for CNTY. Although the stock is down on a year-to-date basis, it has been a high flyer in the second-half of 2016, up almost 30%. Since the beginning of November, Century Casinos has gained an impressive 16%.
Let the big casino stocks worry about the implications of Macau — CNTY is doing just fine.
Casino Stocks to Buy: Monarch Casino & Resort, Inc. (MCRI)
Another smaller gambling outfit, Monarch Casino & Resort, Inc. (NASDAQ:MCRI) specializes in local hotel and casinos in Nevada and Colorado. The limited coverage may appear to be a hindrance due to limited sales opportunities.
However, MCRI is able to provide a level of service that wouldn’t be possible from a larger — and ultimately detached — company. Furthermore, the risk of overextension is lessened.
That’s a point that famous casino stocks are learning the hard way. While Macau is important, it’s also halfway around the world. It’s always a drag when shares tumble. To do so for reasons that are completely outside the realm of influence is extraordinarily frustrating. MCRI is largely able to keep its nose clean by focusing on the issues that matter to them.
This “small town” strategy has led to noteworthy stability in both the balance sheet and income statement for Monarch. Its equity-to-asset ratio is 79%, well above a vast majority of competing casino stocks. Its three-year revenue growth is pegged at a little over 5%, more than twice the industry median. In addition, the profitability margins for MCRI are in the upper third of casino stocks.
Monarch may not be the setting for the next Hollywood blockbuster. What it will provide, however, is performance without a lot of hassle.
Casino Stocks to Buy: Isle of Capri Casinos (ISLE)
Isle of Capri Casinos (NASDAQ:ISLE) is in a fairly distinct position as a middle-ground among casino stocks. With 6,600 employees, it’s definitely not what you would call a minnow.
At the same time, it doesn’t quite have the scope or brand recognition of a Wynn Resorts or a Melco Crown. What ISLE does, however, is a focus on localized, sustainable growth. So far, they’ve been resoundingly successful, opening casinos from Colorado to Florida.
A quick glance at the financials for Capri Casinos gives you confirmation that their target of sustainability isn’t mere corporate jargon. Operating and net margins are firmly in the upper half among casino stocks, while its return-on-equity ratio is near the very top. The balance sheet does leave room for significant improvement as ISLE is using debt to finance their growth. However, on an administrative basis, Capri Casinos runs a clean operation as evidenced by its stable free cash flow.
This effort translates into serious market performance. ISLE stock is up a whopping 75% YTD despite taking a lashing in the early months of 2016. From the halfway mark, Capri Casinos shares are up 49%, confirming that it still has legs to run. Although it tends to be on the choppy side, the company has rewarded those with a steel nerve. Additionally, ISLE stock is firmly above its 50- and 200-day moving averages, providing confidence to those on the fence.
Capri Casinos is proof that casino stocks don’t need extravagant international exposure to receive solid returns.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
Note: Josh Enomoto is an InvestorPlace contributor. You can find out more about him here.
Category: Penny Stock Alerts