Second-quarter earnings season could be challenging for companies across a variety of industries and casino equities slumping, Wells Fargo is telling clients to avoid or short Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN).
On the back of a 17.31% loss over the past month, shares of Caesars are off 57.61% year-to-date. Penn National, the largest regional casino operator, is off 9.27% over the past 30 days, extending its 2022 decline to 47.16%. Both gaming companies are hindered by massive debt burdens, making them unappealing to some investors in the current market environment.
In our assessment, stocks with fundamental issues become even riskier during tumultuous times,” writes Senior Equity Strategist Chris Harvey in a recent note.
Wells Fargo identifies five stocks from each of the 11 sectors that could lag until the Federal Reserve confirms the US economy is slowing. Caesars and Penn National are two of the five consumer discretionary names on the list and the only gaming names in the group.
Caesars, Penn in Precarious Positions
Data suggest that business is brisk on the Las Vegas Strip where Caesars is the second-largest operator and regional casinos — meaningful to both Caesars and Penn — continue performing well.
However, some industry observers believe it’s merely a matter of time before rising interest rates, persistently high inflation and increasing recession speculation take a bite out of casino operators’ top and bottom lines.
The May reading of the Consumer Price Index (CPI) was 8.6% — a 40 year-high — confirming rising prices aren’t dissipating. As it relates to regional casino operators, including Caesars and Penn, inflation is a potentially thorny issue because high gas prices could prompt locals from visiting nearby casinos.
The issue of elevated fuel prices is potentially perilous for casino operators in destination markets, such as Las Vegas. Airlines are passing soaring oil prices onto customers and high gas costs could compel would be visitors from important Las Vegas drive-in markets, namely Southern California and Phoenix, to rethink Sin City trips.
Making matters worse for gaming stocks such as Caesars and Penn is that these are high beta fare and market volatility is moving higher.
“We expect these stocks to be subject to violent reversals,” Wells Fargo’s Harvey said of the names on the bank’s short or avoid list.
Not Betting on Bottom-Fishing
Inflation that seemingly has no end in sight coupled with escalating recession fears could keep plenty of professional investors on the sidelines when it comes to the likes of Caesars and Penn.
“In our experience, fundamental portfolio managers do not bottom-fish in uncertain times like now; rather, they focus on high-conviction names, sell anything deemed ‘marginal,’ and save new ideas for another day,” concludes Harvey.
In fairness to Caesars and Penn, gaming stocks of all varieties are languishing this year, indicating market participants view the current climate as not conducive to embracing these assets.
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