by   |   January 30, 2015   |   on

If You Want to Gamble, Roll for Casino Stocks

Gambling is part of human nature, but it shouldn’t a factor in the equity markets.

And yet many investors view Wall Street as one giant casino.

It’s hard to blame them, as prices rarely act rationally and at times are flat-out manipulated.

As a matter of fact, that does sound exactly like a casino. The house has the advantage and as such will always win.

Well, you can beat Wall Street at its own game by owning casino stocks. In fact, many on Wall Street want you to do just that.

I can’t argue with that opinion as many of the big casino stocks have sold off from prior highs,   thanks mostly to worries about slower growth in China.

If the big whales from China are no longer gambling, profits will take a hit, but how realistic is that?

The beautiful thing about casinos is that they work in good times and bad. China may be struggling to grow at previous levels, but that doesn’t matter. People will still gamble and that flock to places like Macau and Las Vegas.

Perhaps reflecting the negative tone in the market at the moment, Barclays is toning down its view of casino stocks by lowering price targets for three names.

The biggest reduction and perhaps ill-timed change was reducing the price target on Wynn Resorts (NASDAQ: WYNN) to $158 from $190 per share.

Shortly after that change, Wynn shares jumped some $10 per share, closing near the new target price.

There will likely be more gains ahead. A year ago Wynn shares traded above $200 per share. The stock is flat-out cheap at current levels, trading for less than 20 times earnings. The discount can be attributed to worries over China that are overdone.

Wynn will likely exceed estimates when it reports results after the market closes on Wednesday. That will be the catalyst for the stock to jump above Barclays new price target.

One Wall Street firm not expecting good news is Nomura. It has a Neutral rating on Wynn shares and a $149 target.

We’ll see who is right on Thursday.

Barclays also dropped targets on Las Vegas Sands (NYSE: LVS) and MGM Resorts (NYSE: MGM) Interestingly Nomura is neutral on both of those names as well.

Daiwa Securities sees a 21% drop in gaming revenue in Macau in 2015, but revenues improved last week, proving that in the face of economic weakness consumers still gamble.

The fears for a decline are overdone in my opinion.

The time to buy is when opinions are negative.

Even though Barclays has an overweight rating on the three names mentioned, the reduction in target price is hardly a vote of confidence.

When we see shares of casino stocks off their highs, that marks a great entry point for investors.To the extent the global economy performs better than expected, shares in these stocks should outperform the rest of the market.

I would be a buyer of casino stocks at discounted prices, knowing that through thick and thin these stocks will perform.

 

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