Quandary: What a manic-depressive stock market it’s been, moving on news, not fundamentals. Meanwhile, I feel like I missed out on the big profits by not buying gaming stocks in March when they collapsed. What should I do?
Bull: Buy, son, buy. Stocks have rebounded, but they’re far below the highs of just a couple of months ago, and we knew they had room to grow then.
Bear: Wait a minute, Bull. Stocks were priced to perfection in February and March, and there ain’t no such thing as perfection. By the way, that’s the lesson we should take away after this pandemic ends. When stocks are hitting new highs and all anyone sees are blue skies ahead, smart investors take profits.
Bull: I like your reverse crystal ball, Bear. Very clever. Let’s see how good you are looking into the future. Casinos are reopening with lines of people waiting to get in. There is pent-up demand.
Bear: Yeah, there are lines of people at properties limited to 25 percent and 50 percent capacity.
Bull: It isn’t just lines. It’s dollars. Casinos are reporting normal to higher business volumes. You saw that the Silver Slipper in Mississippi took in 12.3 percent more gaming revenue this Memorial Day weekend than last year.
Quandary: But what about the future? What kind of economic recovery should we expect?
Bull: A “V,” of course. Look, this hasn’t been an economic depression. It was a government-mandated shutdown of the economy. Strength still underlies it. The Fed has made sure liquidity remains in the system. Companies have smartly combined cost-cutting and putting cash in their tills. Stimulus programs have tied people over a rough patch. The third quarter—and certainly the fourth quarter—will be gangbusters.
Bear: And millions of unemployed people are going to blow a grand a night at a casino? Get real. Businesses have closed that won’t reopen. Those companies you say have so smartly cut costs have done so by permanently reducing their work forces and putting off capital expenditures. What casinos are going to go on a slot machine buying binge? That all means slow-to-no recovery ahead.
Bull: But we’re talking stocks here. We’ve just completed a round of first-quarter investor conference calls in which CEO after CEO said they can be cash flow positive on 25, 30, 50 percent normal business volumes. That will support stock prices.
Bear: Support them, maybe. But stocks have had their rebound. Limited business levels won’t support these higher stock prices, much less grow them. They’ll head south once the rush of pent-up demand ebbs and the reality sets in that you can’t prosper on 25 percent or 50 percent capacity. Project realistic business volumes and you’ll see valuations are stretched beyond what they were in February and March when they were too high.
By the way, if every company in every old brick-and-mortar industry scales back to operate on such low business volumes, that means millions of jobs lost permanently. That spells recession, if not depression, and no recession yet has been good for stock prices.
Bull: But you don’t have to return to February stock prices to make a profit. You just have to go up from here. Besides, investors don’t have to be stuck with brick-and-mortar investments. Look at the big rise in online gaming, much of which might be long-lasting. And we’re still early in legalization of online gaming and sports betting in the US. Have you ever heard of DraftKings?
Bear: Now you’re talking like a stock-picker.
Quandary: Okay, enough, guys. I’m just going to sit this one out.
Bear: Smart move, Quandary.
Bull: You’ll miss the next big run-up, just like you did the rebound since mid-March.
Quandary: Oh, my.
