Year-end revenue reports from Macau casino companies spurred another boost in stock prices to record levels. How long and how high can they go?


That whoosh you heard a few days ago wasn’t the polar vortex rushing through.

It was the sound of Macau-centric gaming stocks flying by to new 52-week and all-time highs.

They were fueled by analysts who decided almost in unison to issue bullish New Year’s reports on the group, and most especially the American-listed companies—Las Vegas Sands, Wynn, MGM Resorts and Melco Crown.

You would have thought that their giant runs of 2013 were enough. Here are the percentage gains their stocks made last year:

Las Vegas Sands    75
Melco Crown         132
MGM Resorts         103
Wynn Resorts        81

So, new highs to start the year after such extraordinary increases last year begs the questions: How far can they run? When does the run stop? Are they setting up investors for a big fall?

First, a couple old Wall Street bromides, each offering opposing advice:

• You can’t go broke taking a profit.

Any investor who enjoyed all or most of the run up can sell today at a big profit and walk away secure in being safe from any future sell off.

• Stocks that run tend to continue running.

Not only is it true that momentum holds until something happens to change it, but there are strong fundamentals in Macau that the analysts cited together almost like a Greek Chorus. Among the factors:

– Revenue growth in the mid-teens

– Development of adjacent Hengqin Island bringing tens of thousands of vacationers next door

– Opening of the big new ferry terminal this year, bringing in more gamblers

– 2016 opening of a bridge connecting Hong Kong and the Mainland

– Little new capacity over the next two years.

Not only did analysts raise targets, some dared look further into the future than the usual 12 months to see even higher prices.

Jon Oh of CLSA, for example, raised his target on WYNN to $235, but said the stock could reach $280 to $300 when its Cotai resort opens in two years.

That wouldn’t be bad for a stock that just over a year ago was $107.

So, what’s an investor to do? Stay away from stocks that have run so far so fast? Jump on the bandwagon and enjoy the momentum ride?

Here’s where some more old Wall Street wisdom comes in.

For current shareholders who’ve enjoyed big profits, an often-used formula is to sell part of a position, thus protecting the initial investment while staying in for the rest of the ride.

Another approach is to look at the stock market as a leading indicator. Because investors are focused on what business will be like six or 12 months down the road, there can be some comfort in staying in, or buying now, figuring underlying business trends are supporting the stocks.

However, that assumes one knows when those underlying trends will change, and that stocks aren’t priced so high that, to once more employ an old Wall Street saying, the good news is priced into the stock.

Finally, here’s two of our own observations:

• Macau isn’t likely to quit booming for some time. That should continue to support growth in stock prices. A key will be to look at valuations—price to earnings, enterprise value to EBITDA, price to earnings growth. If they start getting ahead of the growth of the underlying business, or well beyond historic norms, that will be a signal to start easing back, or out.

On the other hand, really long-term investors have got to love the growth stories that LVS, WYNN and MPEL represent, not to mention the commitment by Wynn and Las Vegas Sands to return significant capital to shareholders.

• Regional casino stocks in the U.S. might be the place to be.

Regional stocks have been beaten down because of weak revenue trends. But there seems little doubt that the American economy is now rebounding strongly, and that means both more money in consumer pockets and more propensity to spend it. Given years of cost cutting, the bottom lines for regional casinos could benefit dramatically. This could be a chance to catch a wave before it crests, unlike the Macau-centric operators.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.