StarMine Is Very Bearish On WYNN
Last year (Adding Downside Protection To Anadarko) we mentioned StarMine was bearish on Anadarko (NYSE:APC). StarMine had one worse Equity Summary Score than "bearish" though, "very bearish." And that's the score it gives to Wynn Resorts (NASDAQ:WYNN). You can see a video explaining how the Equity Summary Score works at the link, but for those who missed our Anadarko article, here's the summary. StarMine, a division of Thomson Reuters, standardizes the ratings provided by third-party stock analysis firms, giving numerical equivalents to ratings such as "hold," "strong buy," etc. Then it looks at how accurate those firms have been in their ratings, and weights their ratings accordingly, so a "sell" rating, for example, from the most historically accurate firm, has more impact on the Equity Summary Score than a sell rating from another firm.
But This Quarter Could Be Strong For Wynn
February was a strong month for gambling revenues in Macau, as Seeking Alpha News Editor Clark Schultz reported last week. Seeking Alpha contributor Andreas Schulz argued that Wynn Resorts was likely a beneficiary of the Suncity VIP junket in the former Portuguese colony last month:
A second likely beneficiary of this event is Wynn Resorts. As we noted in our review of WYNN's 4Q16 results, the company's new Wynn Palace property has been the dominant market share gainer in VIP in Macau recently. Moreover, we believe Suncity is still one of only three junkets with operations at Wynn Palace as well. In turn, the odds are favorable that WYNN produced strong February results in addition to the strong January numbers the company pre-announced on its 4Q16 earnings call. Again, we caveat that a lot can happen in the next month, but it seems to us that WYNN should be doing better than current expectations as well.
So, as is often the case in investing, we've got a cause for bullishness as well as a cause for bearishness on WYNN. Let's look at a way WYNN longs can hedge their bets in case StarMine proves right.
Hedging Your Bets On Wynn
Since this has come up in comments recently, let's be clear: you hedge when you are long and bullish, but want to limit your risk in the event that you are wrong. If you're bearish on WYNN based on StarMine's ranking, you should sell the stock.
If you'd like a refresher on hedging terms first, please see the section titled "Refresher on Hedging Terms" here). We'll present an optimal collar for WYNN designed for investors who are unwilling to tolerate drawdowns greater than 12% over the next several months (you can hedge against larger or smaller risks than that, we're just using 12% for illustration purposes). We used the Portfolio Armor iOS app to find these hedges, but you can find optimal hedges without it using the method explained here.
Capped Upside, Negative Cost
This hedge caps your potential upside at 8% over the time frame of the hedge. That cap is higher than the potential return over the same time frame estimated for WYNN by the Portfolio Armor website (6%) and higher than the negligible one implied by Wall Street's consensus 12-month price target (via Nasdaq, below).
As of Friday's close, this was the optimal collar to hedge 1,000 shares of WYNN against a greater-than-12% drop while not capping an investor's upside at less than 8% by mid-September.
As you can see above, the cost was $5,700, or 5.64% of position value (calculated conservatively, using the ask price of the puts). But as you can see below, the income generated from the short call leg was higher, $6,100, or 6.04% of position value (calculated conservatively as well, using the bid price of the calls).
So the net cost here was negative, meaning the investor would have collected $400 when opening this hedge, assuming he got the worst end of the spread when buying the puts and selling the calls. Had he placed both trades within the bid-ask spread, he would have received more than $400.
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.