"Keep your eyes on the stars and your feet on the ground, never lose track of who you are…"
The continuing tide of negative commentary about the prospects for Wynn Resorts, Ltd. (NASDAQ:WYNN) is beginning to resemble those proponents of the flat earth theory. In the centuries before Columbus' voyages, they drew maps of the earth as a platform on either end of which was a sea seething with monsters and dragons into which mariners would fall if they dared board a ship that sailed too far off shore.
The problem with flat earth thinking a millennium ago was that such fears developed wide currency and drowned out the provable theories of visionaries like Columbus, who literally had to go begging for financing of his historic voyages.
I'm beginning to see far too many of what I call "Flat Earth Wynn Theorists" generating a continuing flow of bearish commentary; they seem to find a fire breathing dragon hiding behind every positive on the shares that pops into the news. And tincturing their analysis with such fearful caveats, either suppress or kill off rallies.
Stipulation: I have been, am and continue to be strongly bullish on the stock. History has proven investors who stick with the positions long term have been richly rewarded. I always hesitate to quote Warren Buffett as copiously as others as he's had his share of miscalls as well. But in this one, he's right: "If you can't own a stock for ten years, you shouldn't own it for ten minutes." To me that is the quintessential truth that attends my continuing bullish take on Wynn shares. Own it, take money off the table now and then if it suits your larger financial needs, replenish but never forget long-term patience will reward you handsomely.
Of course, there're lots of valid caveats to this stock that deserve pointing out. And yes, rose-colored glasses valuations that don't take real negatives into consideration are patently foolish. Wynn has its share as does any other equity you can name. Even as it now sits on one trillion dollars in cash, you can find chinks in the Apple (NASDAQ:AAPL) armor. Wynn's leverage presses down harder than it should. Its pipeline is great but the timeline of its development properties is long, always subject to delays and changes in marketplace trends.
Its Chairman and singular visionary is 74 years old. He's assembled a strong executive team, has good bench strength; but let's be honest, there is not another Steve Wynn lurking somewhere in management ready to spring miracles for the company' future.
So there are forecasted bearish pops of news that are indeed meaningful - to an extent. Most recently, Morgan Stanley cut its earnings estimates for Wynn in 2017 7% to 10% due to higher than expected Q4 costs relating to depreciation and amortization issues.
MS now expects 2017 EPS to come in flat to 2016. This is not a flat earth belief, but a reasonable possibility, worthwhile for holders to consider as they value their portfolios. We don't agree for other reasons, namely that our estimates of Wynn's 2017 performance takes in what we believe is a stronger performance for Wynn Palace that consensus. Fair is fair, no argument there and others which over this past year have questioned Wynn's strategy in overbuilding that luxury new Cotai property against the emerging mass market.
But along with these reasonable caveats, we have the flat earth theorists opining. Just a sampling from my regular diet of snippets from various statements by analysts and other observers:
1. Wynn's recent appointment as Finance Chairman of the Republican National Committee by President Trump has been characterized as possibly casting a negative shadow both in his own relationship with Chinese officialdom as, more insipid yet, a statement as to whether Trump's decisions on issues like immigration, cabinet picks and attacks on various progressive shibboleths, would cause a massive defection of customers from his Las Vegas casinos. Wynn responded to this absurd question merely saying no, he did not think his association with President Trump would spark massive decisions to boycott Wynn and Encore Las Vegas. Yet, nobody ever raised a similar question to MGM (NYSE:MGM) Chairman James Murren who was a public supporter of Hillary Clinton. And had they, it's fairly certain Murren would have replied no differently to the silly inquiry that had Wynn.
2. Retribution by Chinese Government officials over Wynn's acceptance of a post by Trump. In response, Wynn's reply was measured and reasonable: no he did not expect anything like that and yes, he had every expectation that despite public exchange of words between the US and China, that eventually all matters would find reasonable solutions. 'I have great faith in China and its future," he added. And why not? He's made billions there and will continue to do so. He's an important employer in Macau, he has strong opinions, but on balance has proven himself a responsive corporate citizen of the administrative district.
3. Over the past six months, Wynn shares have oscillated wildly in a fairly narrow range, but provided enough daylight between up and downsides for lots of day trader action plus the exacerbation of quick profit algo triggers. Yet, over the six-month period, the shares have shown a net downside of only 1.4%. In my view, this is entirely due to the ever present nattering of flat earth commenters who have continued to trade the shares between the mid-nineties and low 100s and been able to take money off the table. Good for them, but action that continually tests the patience of Wynn long-term holders.
During the same period, for example, MGM Resorts International, Inc., a company we're also publicly bullish on for nearly a year saw its shares take a 19.9% upside over the comparable six-month period. Las Vegas Sands (NYSE:LVS) chalked up a 3.2% gain over the last six months, tepid in our view, relative to the hard fact base in Macau that the company's dominance increased with the highly successful opening of the Parisian, a property directly aimed at the growing mass market there.
Yet another favorite, we've shared with SA readers is Boyd Gaming (NYSE:BYD), a strong US regional operator, which has shown a 14.4% increase during the same six months.
Clearly, Wynn shares have underperformed these peers for reasons in my view, strongly connected to the constant injection of flat earth commentary, which has distorted the fact-based appraisals of the stock's prospects, as we move forward past Chinese New Year.
Because of Wynn's pricing, its visibility, its long track record of success and the charisma of Wynn personally making news, his share price has always traded at what we have characterized in all of our Wynn posts on SA as the "Wynn Premium," that is in our view a baked in 20% to 25% value to the pricing of the shares entirely based on the wide confidence among its core shareholders that the company is being guided by the certifiable genius of the sector.
4. Commenters have overplayed their "disappointment" in early Wynn Palace results and pointed out that much of the business there was essentially cannibalized from its own Wynn Macau property. That's correct, but what they don't add is that the totality of net dollars flowing to both properties was a plus that contributed mightily to a revenue spike for the quarter. As we've said, two pockets, one pair of pants, what's the difference here?
The overbuilt issue alluded to above, is a legitimate question, but in no way compromises the long-term prospects for Wynn Palace, nor do the endless flow of stories about legal wrangling about the Wynn Everett project, management changes that are characterized as "sudden."
While the Wynn trade benefits from "The Wynn Premium" we've alluded to, it's important to note here that it also suffers from the "flat earth deniers" who constantly draw bearish conclusions from every bit of real or mostly imagined negative sentiment news about the company playable for short-term trades in a range of say $8 a share up or down that is almost predictable, but it's a constant. Given a reasonable bankroll and a sensible options strategy and you can make a living massaging Wynn shares inside that range that isn't as easy to do with any of its industry peers.
There was widespread disappointment that January Macau GGR only came in at 3.1% a big miss from the 8% to 10% forecast. Yet our latest estimates based on our on-the-ground sources and some public statements by officials that a 7% upside is forecasted for February, which includes a two-day stub off CNY. That averages the two-month period with a 5% increase YoY and contradicts some of the flat earthers who have been forecasting the beginning of a return of minus months ahead. That 7%, (we think it could come in at 8%) matches the December number. That tells us that the new capacity, as is always the case in gaming, is slowly being absorbed and not producing big time cannibalization.
On top of this, Goldman this week upped its guidance on Wynn to $110, getting it a lot closer to my guidance after the Q2 earnings release in July of $135.
So as a Wynn investor, you are in essence looking at a different mindset and motivational pulse that moves the shares up or down.
You have the true believers in for the long pull - I'm in that camp. And the short term in and out traders who see daylight between any news, including flat earth hysteria, to plunge in, take a few bucks and backfill.
Here's what to watch for now:
I've done a very deep dive into my own metrics (Klein's Gaming Index) which measures capacity vs. average wins per unit per day, non-gaming revenue streams, ratings of management quality, etc. It's a 360 view not confined by standard security analysis. I am not a CFA, but based on my latest take, I see the fulcrum of the shares trading in this kind of sequence:
1.If after February numbers are released or before I see Wynn moving back into the $100 range. If the stock can sustain that level for at least one month going forward, I think the perception that it can fall back into the high eighties will be extinguished.
2. A strong Q1 earnings report that proves Wynn Palace is taking firm hold on increasing VIP and premium mass, I see bullish sentiment building stronger yet, bringing the shares up to or just past the Goldman call at $110.
3. Continuing strength on Q2 earnings can pop the shares even further by summer bringing it close to, at or beyond my current call for the shares to move to $135. I think we will see target revisions coming on hard and fast if Q1 shows the performance I think it will.
The takeaway: While we never discount the real world impact of negative news, we think Wynn holders need to be true believers in the company, its products, its management and pipeline. And on all of those counts by any measure makes this one helluva company for the long-term investor. And that further implies standing firm against what clearly is a gamester's paradise of quickie trades for fast profits, entirely based on the reliable flow of flat earther nonsense to which this company is, and will always be subject to.
This is a company known for keeping its eyes on the stars and its feet on the ground. And that's the best profile for what its shareholders should likewise believe.
Author's note: My own gaming portfolio is held in a blind trust for my children and grandchildren. It is managed by a former colleague from the industry. She has a mind of her own. I receive reports periodically only on total value and percentage gains and losses. I do not know her trades. The reason for this is plain: I run a consulting business in the gaming sector and wish to avoid any potential conflicts of interest with clients past, present or future.
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.