Why Casino Stocks With Large Interests In China Should Be Sold

 |  Includes: LVS, MGM, WYNN
by: The Independent Investor

It's always easiest to buy stocks of companies that are trading at or near fifty-two week highs. Analysts are usually bullish, earnings are strong, and the stock price is usually rising on most days.

Today the S&P 500 and its tracking exchange traded fund, SPY, has rallied over 20% from the lows of last year, and stocks such as apple are up over 30% this year. Still, most leading emerging markets such as China have underperformed the broader U.S. indexes by a wide margin over the last year.


Even though leading indicators continue to suggest that the Chinese economy is deteriorating, a number of leading casino, restaurant, and other retail companies, such as McDonald's (NYSE:MCD), Nike (NYSE:NKE), and Apple (NASDAQ:AAPL), have continued to report strong numbers in the world's second largest economy. Apple even doubled its revenue in China over the last year, well industrial and financial companies such as GE (NYSE:GE), Caterpillar (NYSE:CAT), and Citigroup (NYSE:C), have also recently reported strong earnings as well.

Some of the strongest recent economic data in China has been in Macau, where recent visitor numbers at record highs, and unemployment numbers have been the lowest in this province's history.

Leading Casino operators in China, such as Las Vegas Sands (NYSE:LVS), WYNN Resorts (NASDAQ:WYNN), and MGM Resorts International (NYSE:MGM), have also consistently reported strong earnings over the last year, and Las Vegas Sands recently reported record first quarter earnings.

This is why I thought it was so interesting to see that the recent tourism and spending data in Macau has finally begun to deteriorate.

Macau's economic slowdown has lagged the general slowdown much of China has seen over the last year. With Macau's economy growing at a record pace just last quarter and unemployment levels in this fast growth province at record lows, it is likely that the current weakness that Macau is starting to see is part of significant and longer-term trend. Average bets at Chinese casinos are more than 7-8x average bets in Las Vegas, and the Chinese gambling scene is much more reliant on high rollers. With Macau reporting record visitation and spending numbers just last quarter well leading indicators continue to suggest that China's economy continues to weaken, it is likely that the slowdown in Macau will accelerate significantly in coming quarters and higher income visitors to Macau continue to be hurt by weakness in the Chinese economy.

Today the overwhelming majority of analysts are still recommending buying stocks such as Wynn and Las Vegas Sands, it is likely that the nearly 25% decline in most of these companies has only partially priced in what is increasingly looking like a prolonged and more serious slow down in this previously hot region. Today eighteen of the twenty-one analysts who cover Las Vegas Sands have buy ratings on the this company,and not one analyst has a sell rating on this company even though estimates for these companies have dramatically declined in the last several months. Las Vegas Sands is the largest foreign operator to Macau.

To conclude, I've been very bullish on many Chinese casino companies such as Las Vegas Sands in the past. Still, given the significant recent deterioration of leading economic data in China, and the increasingly strong signs of a slowdown in spending and visitation numbers in Macau, it is likely that many of the most leveraged casino operators in China will see a significant further deterioration in Asia over the next several quarters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.