Trying to understand the ups and downs of the stock market, or any individual stock, is never easy. The explanations that analysts offer to attempt to explain the fluctuations in the market are always after the fact, and although some market soothsayers do attempt to predict the future, no one can successfully and consistently predict what the market will do tomorrow or next year. There are long term trends that make it possible to say with confidence that the market will recover, or that there will be a major downturn, because the market has always recovered, eventually. And beyond that, there is always another downturn on the horizon. Complexity notwithstanding, however, there are scores of people who make money trading stocks – and scores of people who make money analyzing the market and advising other people about what to do with their money.
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Recently, Roth Capital analyzed the four public companies that operate casinos in Macau and concluded that all four – MGM, LV Sands, Wynn Resorts and Melco – are too highly dependent on Macau. Roth said that the companies were not good investments at the moment and opined that the Macau gaming market was going to take a long time to recover from the coronavirus, saying explicitly that they do not expect Macau gaming revenue to return to pre-pandemic levels before late 2021. To add to Macau’s current downside, all of the city’s gaming licenses are coming up for renewal in 2022, and no license is guaranteed. The stock price of those companies dropped between 3 and 5 percent each. Big drops, albeit small potatoes compared to the calamitous drop in their stock prices in mid-January, February, and March.
Five days after the Roth report, The Motley Fool published a piece expressing the precise opposite opinion. In the Fool’s mind, now is the time to buy the stock of companies with casinos in Macau. The stocks were down now between 20-40 percent, the Fool said. Bargain prices for bargain shoppers. The Fool expects the trend to change in October, and for the stock prices to concomitantly go up. The first week of October, of course, is the Golden Week, a seven-day holiday that is the second biggest travel/spend time for the Chinese after Chinese New Year. The Fool thinks it may be the beginning of a turnaround in both travel to Macau and gaming revenues.
Both analyses are right, even though their conclusions don’t match. Macau in 2020 is wholly dependent on China, in much the way that Ireland depended on potatoes in 1845. If a broad swath of China’s population gets sick, or the central government changes the rules, Macau becomes like Ireland in the midst of the famine. And the casinos licenses are up for renewal, as Roth pointed out, and no one knows what the criteria for granting or denying licenses are. That alone is enough to give a person indigestion.
At the same time, relations the United States and China are going through a difficult period, to put it delicately. China could choose to punish American companies, much as the U. S. is currently doing with Tik Tok and WeChat. That, too, is downside. On the other hand, the license renewal is over a year away, and there are signs that it may be postponed. The Chinese economy is recovering nicely, travel restrictions from China to Macau have been lifted, and this year is mercifully approaching its final day. 2021 could be better, much better, than 2020 has been. That is the upside. Make your choice, and buy or sell accordingly.
The companies with casinos in Macau are not the only ones suffering at the moment. Every casino stock, more or less, has plunged since the pandemic started. In January and February, the gaming industry was looking at a normal year and the prognosis was good: stock prices were up, and the analysts had positive outlooks. In Macau, by February, it was clear that the casinos would be forced to close. Worse for Macau, all of China was being shut down, which that left the casinos without any customers even when their doors were open. Macau’s casinos were only closed for two weeks. Casinos did not start to close here until March, but once they did, they remained closed for months. The closures hit the stock prices hard, but as casinos began to reopen and business appeared to be brisk, there was some recovery.
The third quarter is nearly over, and the quarterly results of gaming companies will still be impacted by the pandemic. But there is reason to join the Motley Fool here. The year is nearly over. The fourth quarter will likely be another quarter that suffers in comparison with the previous year, but better than the second or third quarters of this year. And beginning with the first quarter of next year, most companies will have good news to report. 2021 is almost certain to be better than 2020. The numbers will probably not be back to 2019 levels, but publicly traded companies are compared to the same time period in the previous year, not two years ago. The following year, 2022, needs only to get back to 2019 levels to be another good year for public gaming companies and their stock prices. To give Roth its due, if you look at the long term, there are some dark clouds on the horizon here, just as there are in Macau. However, the stock market is famous for being shortsighted, looking only at one quarter at a time. For casino stocks, the next two years should be fairly good. Who said it was impossible to predict the course of the stock market, anyway? Grain of salt, anyone?
