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Wednesday, November 5, 2014

Digging a Ditch to Hell or Building a Stairway to Heaven?

I can't help myself.  I just can't. 

Anyone who follows gaming stocks knows that over the past few months, the sector has been crushed.  Absolutely crushed.  While the indexes continue to rise, LVS is in the $50's (down from a high of $88).  MPEL is $24 after hitting $45 earlier in the year.   The culprit?  Largely the Chinese government, which has been cracking down on corruption which, in turn, has purportedly chased the VIP segment of the Macau market into hiding.  As a result, after years of year-over-year growth, revenue in the world's biggest gaming market is on the decline.  Add to this the fact that Japanese parliament is apparently punting on its casino bill this session, and gaming stocks have taken the biggest hit since the perfect storm in 2008. 

But, for how long?

Sheldon Adelson views Macau's issues as simply cyclical.  And if there is one thing I believe, it's not to doubt "Uncle Shelly."  Say what you want about the man (and, I'm sure poker players have some choice words given Adelson's stance on on-line poker), but the guy is a visionary.  While Steve Wynn may build the worlds most beautiful casinos, it is Adelson's vision that is transforming Cotai into the world's greatest gambling mecca.  If Adelson continues to build, I will continue to invest (it's worth noting the opportunities that Adelson has passed on -- Manila . . . Spain . . . additional domestic casinos . . .  In short, when Adelson moves into a market, his plan is to transform, not simply build a casino for the sake of building a casino).

As for Macau, the government's efforts are having the effect of transitioning the market from VIP to mass gaming which, over the long haul, may actually lead to larger growth, particularly as the Chinese middle class continues to prosper.  Infrastructure in the region continues to improve, most notably with a soon-to-be opened bridge from the mainland to the Cotai Peninsula.  And capacity continues to ramp up with all of the major players (LVS, MPEL, WYNN and MGM) opening new projects in the next several years (despite the numerous existing concessions, LVS continues to gain market share, particularly in the mass market).   Add to this the development of non-gaming attractions currently underway nearby, aimed at bringing family entertainment to the region, and Macau's possibilities seem limitless.  Macau may soon be more than just a mecca for gambling; it is shooting to be a world-wide tourist destination.

It seems to me, at this very moment, that LVS is the perfect combination of growth and value.  Is gambling going anywhere?  Is the Communist government in China going to tank the Macau economy?  I'm betting the answer to these questions is "no."  In the meantime, the company continues to give back to shareholders with regular dividend increases and an ongoing stock buy-back program.  So, while LVS continues to be the proverbial "falling knife," I continue to buy.  Hell, in 2015, at current PPS, the yield alone will be north of 4%.

You often hear the philosophy that diversification is the key to investing.  I call bullshit on that.  I certainly believe in mutual funds.  Indeed, they hold the majority of my investments.  However, I also believe that when you have a winning idea, you pound it into the ground.  Since 2008, the gaming sector has been my winning idea.  And now, as 2015 nears, I still believe that to be the case.  Short term - who knows.  It's been painful.  Days like today, I look at how disproportionately my portfolio leans towards gaming (the only individual stocks I own are LVS, MGM and MPEL) and I watch the market open, and feel nauseated.  But, you know . . . "blood on the streets" and all . . .   I'm willing to gamble on the thesis long term.  Gamble BIG.  In 2020, I'm either going to be crying over my foolishness, or rolling in funds.  But, as we all know, unless you're Tony Bigcharles, you can't beat the casino.  So I'm betting on the casino.   Time will tell if the bet is a winner.        

10 comments:

  1. You sir are the anti-TBC. You understand what long term means and it shows here in this blog. Actually, when there was blood in the streets during the last couple of weeks before the minor bounce back, I was writing put options like a madwoman on value stocks. Good reading!

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  2. no MMJ stocks??? sweet post. i think fantasy sports like CFB is yr future. FUCK Matt Berry!!!!!!!!!! iam just waiting 4 the 1st 420 poker room. now that will b a gamechanger. poker,weed,comps,sports betting,bitcoin(mayb),edibles. Heaven. well Happy Hump Day biiiiiiitches

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  3. In poker you have to back your judgment. Same with stocks, I guess.

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  4. I think things are going to drop a bit more before the strong rebound, but I agree with you that the general direction of the future will be back up. China is so risky right now that the you need to price in the risk not only with the government control but also the monetary policy risk. That alone gives you a 20 to 25% discount on the Macau cash flows. Japan killing the casino legislation was big. The new Marriott in Osaka has its lower floors empty in anticipation of a Casino that will now most likely not be given the green light by the Diet until after the Olympics. Shelly was pissed about that one.

    I am buying MPEL now and as the touts say I will "back the truck up" anywhere in the teens, which I think it is heading over the next two months before rebounding big time.

    MIV.

    Disclaimer, I don't know shit about stocks.

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    1. MPEL in the teens would be painful for me . . . I'm averaged in at $26 on, like, a lot of shares . . . But, if it does happen to fall there, only thing to do would be buy more . . . Good read here:

      http://tinyurl.com/ovkwvxg

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    2. I hope they are right that the City of Dreams in Manila is a game changer. I have spent a lot of time in Manila and quite a bit in the Casinos recently and I have been underwhelmed at every turn. From service, to safety and offerings including food and drink and game the Manila casinos are lacking.

      But in defense of the Casinos in Manila I dont currently see the financial base among the customers to support the Macau or Las Vegas style of offerings.

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  5. The stock talk is far over the head of this lower middle class reader, but as a grammar and word usage nazi I would just like to congratulate you on your correct usage of nauseated versus nauseous. Most people get that wrong.

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    1. exactly, good point. i was going to say that about the nauseated part too. P3 smart. his grammar is goood. he must b eating that peach pie on the regular now

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  6. The casinos here in the states will start thriving again when the economy picks up. It will start soon now that the country recently turned freedom red again. Come 2016 with a strong GOP leader in the Whitehouse (my pic Wis. Gov. Scott Walker) the economy will boom along with the casinos. It will really take off if they lessen the taxes that are keeping all the cash overseas. There will be a flood of money back to the states if the elected play there cards right.

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  7. http://www.fool.com/investing/general/2014/11/10/the-single-best-gambling-stock-money-can-buy-right.aspx

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