The year 2015 was not a good one for gaming stocks. The Market Vectors Gaming ETF (NYSEMKT: BJK) is down 19% year to date. This exchange traded fund is essentially a proxy for owning the biggest Macau stocks, and Macau has had one of its worst years ever.
There are two main causes for Macau’s big decline in 2015, which is really a continuation of its fall since the beginning of 2014. The first is the artificial capital controls imposed on the Chinese territory from the mainland in an attempt to prevent what Beijing calls money laundering. The second cause is China’s central bank being forced to slow down its gargantuan money printing schemes since the late 1990s.
Nothing can be done about China’s monetary policy, but despite that, 2016 may prove a better year for gaming stocks, including Macau-based casinos. Investors need to watch political developments closely though. The capital controls issue is fairly easy to monitor. If Beijing announces a loosening of restrictions in terms of money flowing in and out of Macau from the mainland, then gaming stocks will soar.
Keep in mind though that these controls have been in place long before the current decline began. They necessitated middlemen capital-transfer firms called junkets that loan mainland VIP gamblers money on site and expect to be paid back in China. The somewhat shady arrangement allows the VIP gamblers to transfer money without actually transferring it. This setup was able to circumvent capital controls temporarily, but in 2015 the junkets themselves came under attack. Macau casinos could not meet their revenue goals without the VIP gamers, and stocks fell across the board.
Early in October, though, the Chinese government announced that it would institute what it called “helpful policies” to stimulate the Macau gaming scene. Besides speeding up a few building permits, there was little mention of loosening capital controls. Nevertheless, stocks like Wynn Resorts Ltd. (NASDAQ: WYNN) were up almost 25% that day. Since what is choking off Macau revenue is to a large degree artificial, loosening that choke hold will push all Macau stocks much higher, but only if it actually happens.
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Here are four Macau stocks that would skyrocket in that event, from most risky to most defensive.
Wynn Resorts
Wynn is down 54% year to date. It has already shown what it can do on the mere rumor that capital controls will be loosened. It is down more than its peers, with more concentrated assets in Macau, which makes it especially attractive if you’re betting on China easing up on the industry. Some 41% of its revenues came from Las Vegas last quarter. The rest is all Macau.
Melco Crown
Melco Crown Entertainment Ltd. (NASDAQ: MPEL) is a broader Asia pick but still centers on Macau. Known for its focus on the mass market rather than VIPs, Melco is more balanced in that sense than Wynn. Melco still jumped 44% in the first week of October after China hinted that it would liberalize its Macau policies. This is just a preview of what the stock could do if the Chinese government actually did allow more capital flow, which there is yet little evidence it is actually doing.
Las Vegas Sands
Sheldon Adelson’s prized possession teaches a great lesson in stock market panic and the true meaning of the term “roller-coaster.” Las Vegas Sands Corp. (NYSE: LVS) was flying high in October 2007, trading as high as $144.25 a share. On March 9, 2009, 17 months later, the stock had lost a mind-boggling 99% of its value, trading at a low of $1.38, even though it was never in danger of total bankruptcy. It went all the way back to $87 before topping again in March 2014, a 6,200% gain since bottoming. These are figures you generally only hear about penny stocks.
Las Vegas Sands is more of a defensive pick at this point, as far as gaming stocks go, and probably won’t shoot as high as Wynn or Melco if Beijing eases restrictions, but it will still perform very well in that case.
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MGM
Getting even more defensive, we have MGM Resorts International (NYSE: MGM). MGM only gets about a quarter of its revenue from Macau as of the most recent quarter, and it is still the number one employer in all of Nevada. MGM had a great year by comparison, up 6% year to date. MGM would have the most muted reaction to positive political news regarding Macau capital controls, but it will still benefit substantially.
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