As Good New Builds Higher On Key Gaming Stocks, The Shares Slip Badly. What Is Going On Here?

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Includes: LVS, MGM, MGP, WYNN
by: Howard Jay Klein

Summary

These stocks should be trading much higher on solid news from Macau, Las Vegas and US Regionals.

Where is the disconnect coming from?

Year end portfolio dressing, high frequency trading as the group was up strongly this year?

"Everything we hear is an opinion, not a fact. Everything we see is perspective, not the truth…" Marcus Aurelis

No investor has a franchise from god to make money all the time. We all take our best shots based on information we trust, experience, and pure gut instinct. So even when our highest expectations for a stock based on good news goes south, we need to get a grip and realize the market makes up its own mind. We all believe that ultimately the wisdom of crowds will rise out of the din and reward smart buys and punish bad ones.

So there's no room for whining in this world. We rejoice in our victories and lament our defeats but we don't brood. We get on with it. Yet sometimes when the trajectory of certain stocks move in out and out defiance of all logic, we need to take note. Something we can't see is going on. We need to stop and ask:

Wait a minute, all signals are pointing north on this stock yet its getting killed. Sloshing in a narrow rang is one thing. We've learned to expect market indifference from time to time.

But what happens when shares not only slosh but get caught an unjustified downward spiral? Despite much good news impacting the sector, guidance numbers being raised, forward earnings projections upped, there has to be something else responsible for the yawns or outright selling pressure. Could this defiance of what is patently obviously bullish news possibly emanate from dark corner algorithms conjured by quants, who have found games to play unrelated to real world performance of the shares they target?

Whether it's the case or not, it's currently dogging key stocks in the gaming sector. What goes on here?

Over the past week we've talked with industry friends and associates about this odd disconnect and virtually to a person, all were equally baffled. "All we see are arrows pointing north," one executive told us. Another executive pointed out, "Our business is so visible to the wider public. Whatever happens good or bad makes news other sectors don't. I mean who really cares what happens in the toothpaste industry? But now, you have to ask yourself, where's the bad news driving the stocks lower? The answer is, there isn't any.

For our purposes here, let's look at three stocks we follow to bring some perspective to the trades: reality vs. perception.

MGM Resorts International (NYSE:MGM)

Price at writing: $28.59, recent high $30.62

Consensus target: $30/$38, our initial target early this year was reached. Now we're guiding for $43 by end of Q2 17.

The news in brief:

1. MGM's Q3 Las Vegas numbers are strong in all service lines: gaming is up, REVPAR is up, non-gaming across the board is up.

Convention bookings are strong, attendance at entertainment venues is high, its pay for parking experiment thus far-seems to have been a right call.

2. The National Harbor launch. As we had forecast from early this year, this Maryland integrated resort development had home run written all over it. In the 12 days since opening it has attracted an estimated 190,000 visitors and still climbing. Customers have been turned away. Yet, MGM shares, up 33% since last Spring with a buy recommendation from 12 out of 12 analysts is wallowing. is still wildly undervalued. But it's two dollars off its high. The NH property will produce strong accretive EBITDA to MGM's Q 1 and Q2 numbers. This stock should be flying.

3. MGM responded to shareholder pressure last spring for more clarity on its strategy by splitting some of its selected properties into a parent controlled REIT, MGM Growth Properties,Inc, (NYSE: MGP). The stock debuted at $21 and trades today at $24.70, reflecting we believe to some extent, the bullish outlook on its parent.

4. MGM's Macau property is getting its share of the recent recovery in that market and ready to move its Cotai development into action by late Spring 2017, at a time when the GGR improvements will be in their 8 th consecutive month of northward performance. Evidence thus far is that the opening of Wynn Palace and LVS's Parisian have not been materially cannibalizing on the market, but contrary wise, have contributed to an upsurge of mass visitation.

5. Japan. Just last week the Japanese Diet voted to authorized integrated casino resorts. MGM was among those companies in the forefront of supporting Prime Minister Shinzo Abe's effort to get the bill passed. The company is expected to be among those with a high probability of being awarded a license in this estimated $30 billion market to come. CEO Murren is on the record, telling the market he's prepared to invest up to $9.5 billion in a Japan property.

Las Vegas Sands (NYSE:LVS)

Price at writing: $54.70 down from a recent high of $59.

Most recent upgrade by Goldman Sachs: $68.

Our target: $70.

1. Strong GGR recovery in Macau since last August is continuing. Estimates for 2017 GGR: Range from 8% to 10% up. Our call: 12% or better. Most of the upside GGR is coming from the mass segment, in which LVS is the dominant player. Reception of its new Parisian property has been widely positive on all service lines, gaming, non-gaming and shopping, according to our sources in Macau.

2. Our estimate agrees with SA commenter jensan96, repeat, estimate not prediction, is that for 2017 LVS will see revenues rise to $13 billion throwing off an EBITDA of $4.81 billion against a 37% margin if not better.

3. LVS Las Vegas properties are sharing in the total upside in that market with improving numbers across the board in all service lines.

4. LVS, Bethlehem PA, property is outperforming its statewide peers showing an increase in table games win against a slight downside from its aggregated competitors. Now that the chimera of a possible north Jersey Meadowlands casino development has been nixed by that state's voters, Sands has removed what could have been a major threat to its business base, particularly its strong Asian play from New York's Chinatowns in Manhattan and Flushing Queens.

5. Like MGM LVS has been an active player in the Japan support lobby for over six years. Because of its financial heft, track record in Macau stressing mass tourism, and even the quiet connective tissue between CEO Sheldon Adelson and President-Elect Donald Trump, LVS is likewise expected to be a first team prospect for licensure in Japan. While the Diet has taken only the first of many steps and the opening of any resort before 2022 is unlikely, we believe there are stages along the way to that date where events will play positively to LVS shares.

Wynn Resorts, Inc. (NASDAQ:WYNN)

Price at writing: $88.43

52 week range: $49.95 to $109

Consensus target: $98

Our target: $135 by Q2 2017.

Wynn shares have encountered more headwinds for fewer reasons than any other stock in the group. It has become a sitting duck of the short money, seemingly more volatile and vulnerable because of its "Steve Wynn" premium baked into its pricing for decades. The company's fans, including myself, understand this is no investor relations puffery. Over time the developmental creative genius-yes genius, exhibited by Wynn projects is naturally the product of many minds. But nobody is under any illusions that the heart and soul of the company's future lies inside the mind of its Chairman. And that's one of the principal reasons why the shares have historically traded at a premium. The price spread between what the numbers might suggest and the actual trade is wider than peers. And its understandable. Long term investors with Wynn have nothing to complain about. Between appreciation and dividends they've done very well. Here's a few reasons why.

1. Macau recovery is also beginning to show an upside in VIP play which is the core strength of Wynn properties.

2. Initial disappointment in the opening performance of Wynn Palace hit the shares mostly because it was unexpected. The property is spectacular, customers are flocking to it and average bets and visits by VIP players are rising again. What hit the shares here was the surprise news that Wynn attributed infrastructure construction obstacles as the primary reason for the early so-so performance. That clearly was a failure of investor relations policy in general and Wynn in particular. Long known for transparency, if not bluntness in his comments, Wynn had been silent through the runway nearing the opening on the issue.

We pointed that out on SA and still believe the stock would not have taken the hit it did had the company been more forthcoming. Since then our on the ground reports indicate a stronger, upside performance for the Wynn properties with special attention to the VIP improvement, which few observers anticipated.

3. Wynn has the best pipeline in the business. Two projects are deep into development. First, Paradise Park, the first ever lagoon/outdoor casino resort ever built in Las Vegas. It will have 1,000 rooms, water sports, waterside dining and entertainment and literally be a game changer in that market. Second, Wynn Everett (Boston). The company won a long, bruising competition for this sweet spot location now scheduled to open in 2018. It will transform the face of New England gaming specifically and the hotel industry as well.

4. Wynn has recently sold a 50% interest in his 75,000 square foot Wynn Plaza mall project scheduled to open fall 2017. The company will receive $472 million from Crown Acquisitions of New York, a major player in mall development and management. The move has been attributed mainly by insiders as a strategic decision to raise the company's profile in the shopping space nationally. However other individuals we spoke to also believe the move has an element of "deleveraging the balance sheet and preparing to shape it for a possible move into Japan down the road." Whatever the reason what is clear is that the move is no sell signal by any measure and should not impact the shares negatively. Yet since the announcement, the shares have continued to slide.

4. Japan. Wynn, along with its two major competitors noted above is clearly on tap as well as among the favorites to be considered for a license in Japan. That nation's cultural sensibilities are highly developed, an element which will play strongly to Wynn's creative strengths. He won out in Boston because he presented the best mousetrap. We believe Japanese officialdom will respond well to the integrated resort plan Wynn is likely to present.

So with continuing good numbers out of Las Vegas, rapidly improving results in Macau, two strong pipeline projects on the move and a prospect of entering a $30 Japanese market, the question raised with Wynn, as well as his competitors listed above is:

So what's going on here?

1. The short money has played these stocks (mostly Wynn and LVS) all year on quick in and out options strategies. There is an undercurrent that they are vulnerable to any news that can be twisted to sound negative. Ex: The ATM mess. Even when that bad reporting was repudiated by the facts, many observers continued to hint that they saw a long term risk on from the Chinese government's flight capital scare that ultimately could indeed impact Macau business up to 10%.

This is utter, empty-headed speculation that no single contact of ours in Macau believed to have any validity. Caution: As we always point out, nobody, but nobody, including the gloomsters, can ever predict what the Chinese will do. But as in the past, in the end, cooler heads always prevail. Farmers do not kill the geese that lay golden eggs.

Despite this for example, Goldman Sachs has raised LVS as a "conviction buy" at $68, the strongest rating it can give.

Count the catalysts

There is no sector we can see with more bullish catalysts going for it than in gaming:

1. Macau is on the mend. Inferences that China may lower a boom downstream are wrong-headed guesswork and hardly worthy of betting on any time soon. Over a matter of days, Macau officials have commented about their high confidence that its market will suffer no cannibalization from Japan. "Our industry has a solid future' with or without Japan," one official told me.

2. Las Vegas numbers are strong. Major players are investing both in the locals and tourist markets. All metrics point north. The NHL is preparing to field a Las Vegas franchise, and the NFL move to bring the Oakland Raiders to town isn't far behind. A massive marketing pus to link Vegas visitation with away games of these teams will pour millions of accretive gaming dollars into the town across the board:

rooms, gaming, dining, sports books.

3. US regionals with spotty exceptions are doing well, either holding their own or seeing upsides in low to middle single digits.

The spooky stuff

We've talked to close friends who run big portfolios at major brokerages and funds. Most are head scratching these slides as well. One source thought the higher than average spikes up or down on stocks like Wynn for example, are tempting targets for high frequency traders who have a broader spectrum between bid and asked to massively head to the front of the line, do their trades on the downside,etc. As everyone knows the very nature of HFT produces "ghost liquidity" that appears and disappears immediately, distorting the true picture of trades by regular investors. There is clear and constant shorting on these stocks because of that wider possibility possibly worked into algos of big traders. Anything beyond that that smacks of games is beyond our expertise and needs airing in appropriate forums.

Time for Wynn and Adelson to go public and make some well deserved positive statements to the market right now

Its more than clear that by any measure, with the catalysts built in over the past 6 months, that these stocks should be flying. The CEO's owe the shareholders more than the long waits between earnings calls to step up to the plate and justifiably do some cheer-leading. We're not suggesting donning the barker's straw hat, cane and patter like they're hustling carnival games. Nor are we talking about nudging out information that rightly and legally belongs in earnings calls. Instead we believe its an investor relations move long overdue. James J. Murren, CEO of MGM has issued several press releases on the Japan developments and has been vocal about the improving performance of company properties in Las Vegas. And his shares have taken the least hits of the three mentioned in this article.

But Steve Wynn and Sheldon Adelson, understandably busy as they are working in tandem on regular business and the Trump Inaugural, need to take a time out and send a strong message to the market. They've been too long on the sidelines watching algos running their stock prices. Investor confidence needs a boost from the top. It's the best antidote to the fast trade crowd they can deploy.

1. Both their companies have weathered strong headwinds and are now poised with more catalysts for an upside than the stocks in nearly any other sector.

2. Both are market savvy operators who well understand that the prices of their shares are clearly being impacted by large scale in and out traders not long term investors who see the true valuations of the shares as businesses. This is especially vital for the retail investors, big and small, to hear.

And hear it now.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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