With the opening this week of the Cosmopolitan Resort in Las Vegas, the gaming industry is front and center in the news. The last few years have not been a good time for the industry. The Nevada results have been stagnant after some severe declines. The Atlantic City market continues to decline in the face of hard times and hard competition from the new casinos in Pennsylvania and New York. The Indian casinos in Connecticut have declined as well. Indeed, all around the US, the casino industry has fallen on hard times. Even in the international markets like Macau there has not been much success for an industry that used to count on double digit annual growth. So the question remains: is there a good investment to be made in the gaming industry?
My answer is that there are good places to put your money in gaming, but the nature of these investments has changed from a few years ago. Casino stocks used to be held for maximum growth as one or another mega resort opened to enormous crowds that threw money at the tables almost as fast as they could. Now, I view casinos as a place to take advantage of high returns when the purchases are coupled with options. In this regard, my favorite casino stock is MGM Resorts. MGM owns some of the biggest name casinos in Vegas like the Bellagio, Mirage, Luxor, Aria, Excalibur among others. It also owns the City Center in Vegas. Its properties bracket the new Cosmopolitan, so it may even gain from the buzz surrounding this new destination. MGM also has a mega casino in Macau, the eponymous MGM Macau. As a result, it is centered in the two major markets where casinos are doing the best at the moment.
Because of the volatile history of the casino industry, the options for these stocks carry higher time values than for many other industries. For example, As of the close on Wednesday, MGM stock was selling at $12.72, and the March 13 calls were fetching $1.40. Thus, buying the stock and writing the option cost a total of $11.32, and the potential return if the stock closes above $13 on the March expiration date is around 58% on an annualized basis. In other words, because of the high time value, if the stock rises just 28 cents or a little over 2% over the next three months, this investment translates that into a 58% annualized return. further, the investment remains profitable unless the stock goes below 11.32 at March expiration. That would be a decline of over 11% in three months. For me, this risk/reward ratio is quite inviting.
there are obvious risks associated with MGM. The future of gaming in Vegas is not yet clear. MGM is likely to be one of the survivors, but with the economy in its current shaky condition, nothing is guaranteed. Nevertheless, with returns like the ones outlined above, I think that a small investment in MGM could pay big dividends.
Disclosure: I have been in and out of MGM many times in the last year. Each time, the ownership was coupled with a covered call. At the moment, I have no position in the company, but that may change shortly.
UPDATE: After the open this morning, I purchased MGM at 12.86 and wrote the March 13 calls for $1.46.
1 comment:
Hi Jeff,
I entered in to MGM @ USD 13. Your this post confirmed my thinking and I bought at right time as it has been rising since then.
I had entered LVS when it was $4.5 and sold @ 22 but sky rocketed up to $50 while MGM stayed there below $ 15. That was my logic that MGM should move now as economy is in much better shape and I expect this stock to follow LVS at least up to some level in few Qs.
Vajju
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