This year is shaping up to be a little better than last, though it’s a far cry from making stock picking crucial for 2022 losses. Dow Jones US Gambling Total Stock Market Index That’s been rising steadily over the past three months, so some investors may want to consider the stock a gamble.
LAS VEGAS, NEVADA – MARCH 18: A position board with results and odds at Caesars Palace Race & Sports , [+]
As luck would have it, at least two hedge funds have featured gambling stocks in their letters to investors. Among the stocks mentioned were Golden Entertainment
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In fact, working capital Gambling operators and suppliers held a 20% industry position in the fourth quarter, while DG Capital has been holding a number of gambling-related stocks for a long time.
Performing Capital reported that shares of gambling operators generally rose about 20% in the fourth quarter, while slot suppliers lagged. While a risk-on rally has driven stocks of both operators and suppliers higher this year, MGM has been a particularly strong performer recently.
The bull thesis for gambling stocks
In his fourth-quarter letter to investors, Howard Rosenkrans of Performing Capital presented a bull thesis for naming gambling. Their experience has been that gaming operators and, to a lesser extent, suppliers often become over- or under-valued.
Rosenkrans noted that gaming stocks are “wildly overvalued” in 2021 due to the sharp rise in enthusiasm for online sports betting and its poster child, DraftKings. However, he added that online sports betting is a low-margin business that requires massive marketing and promotional efforts, which has resulted in “sudden” losses for the companies involved.
According to the fund manager, the market “turned viciously against the space” starting about a year ago, with almost all gambling stocks falling, even those that had no exposure to online sports betting. . He added that fears of a recession further exacerbated the downturn, and gaming suppliers also fell.
However, the investor also noted that gambling has proven to be a recession-resistant business, and gaming suppliers are even less cyclical. Slot machines are typically leased, creating an ultra-high cash flow stream over several years. Recurring income for Avery and PLAYGS accounts for about 70% of their sales, giving them better visibility, he added.
DG Capital starts buying gambling stocks as sports reopen stemmed from the COVID-19 lockdownAnd many of those holdings have done exceptionally well over the past three years.
Avery Holdings
Avery Holdings, a leading supplier of slot machines and the number one player in fintech kiosks for casino operators, is highlighted in letters from both Performing Capital and DG Capital. Rosenkrans said Avery represents 7% of his fund equity and is his largest gaming position. He described the company’s turnaround as “highly impressive”, adding that the company “has come down significantly.”
Since it announced record third-quarter results against a challenging comparison, the fund manager believes Avery is “firmly established in growth mode as both a slot supplier and fintech player.” The company also reaffirmed its guidance for another record year while continuing to repurchase shares to return capital to shareholders.
Avery has been quite active in M&A to round out its offerings and enter new markets through smaller “tuck-in” deals. Additionally, he highlighted the company’s “cashless” gaming and other solutions. Just 12 to 18 months ago, investors were giving at least $500 million, or $5 per share, to just that business.
However, Rosenkrans now believes that no premium is being applied — even as the company continues to enter new casinos and jurisdictions. He sees cashless adoption as inevitable among all major gaming operators. As a result, he expects Avery to enjoy another record year in 2023 as it continues to generate significant free cash flow, warranting an “increasingly high multiple.”
DG Capital has highlighted Avery Holdings in several of its previous papers over the past few years, and it remains a top long position with a 5.3% weighting as of the fourth quarter. While Avery has been a long-term winner for the fund, it was listed as one of its biggest detractors during the fourth quarter.
Although DG has been buying Avery since at least 2020, fund manager Dov Gertzulin reiterated his bull thesis in his Third Quarter Letter for 2021, He added that the company was gaining market share in slot machines, which increased from 6% to 10% of its new shipments that year. He also said the company was enjoying better economics on its premium games, in which it earns a share of the casino operator’s daily win totals.
other terms of note
DG Capital reports that gaming investments in Caesars, Avery and Inspired Entertainment “accelerated in price” during the first quarter. Gertzulin cites his strong financial results and the progress of business transformations as the primary drivers of his strong performance.
Although the fund has reduced the size of these positions as their share prices have increased, it maintains “meaningful exposure given their excellent fundamentals, low valuations and upside potential.” Dow lists Caesars Entertainment as a top holding with a 3% weighting in the fourth quarter.
He has repeatedly exposed Kaiser over the years. In Q3 2021, the casino operator was one of DG Capital’s top positions and a top contributor since the fund started buying shares in Q2 2020.
Along the same line as Caesars, Performing Capital also highlighted MGM Resorts, although MGM has a significant presence in Macau, which is just opening back up and should provide near-term upside. Rosenkrans believes that new CEO Bill Hornbuckle is a significant change from previous mismanagement.
He noted that MGM shares dominance of the Las Vegas Strip with Caesars, with the two casino operators controlling almost the entire Strip. Howard described MGM’s casino portfolio as “the largest scale of ‘trophy’ gaming properties in the world.” Additionally, MGM management sold nearly all domestic real estate companies to REITs at premium valuations, giving the company a deep discount.
Full disclosure: I used to work for Howard Rosenkrans as an equity analyst before he started Performing Capital.
Credit: www.forbes.com /