Traders, Analysts Diverge on Casino Stocks

Analysts have been turning their backs to casino stocks, while trader confidence toward the sector is seemingly on the rise

Aug 13, 2015 at 12:07 PM
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Much like the broader market, it's been a choppy year for the gaming sector. Much of the up-and-down action has stemmed from traders trying to get a grasp on data out of Macau -- the only place in China where casinos can operate. For instance, traders cheered June's revenue figures, only to be disappointed by the latest numbers last week. All-in-all, the Market Vectors Gaming ETF (NYSEARCA:BJK) is off roughly 5% year-to-date. 

In the meantime, analysts having been growing more and more bearish on the sector as a whole. In fact, out of all the sectors we cover at Schaeffer's, the gaming sector has seen the largest drop-off in "buy" ratings over the past year, according to data from Senior Quantitative Analyst Rocky White. Taking into account the 10 stocks under our gaming sector umbrella, only 43% of ratings from analysts are a "buy," versus 61% one year ago. This is also the fourth-lowest percentage of all the sectors we cover. Brokerage firms clearly don't have high expectations for casino stocks. 

But while analysts have been leaning away from gaming firms, options traders have remained more interested in calls than puts. According to the gaming sector's average Schaeffer's put/call open interest ratio (SOIR) of 0.53, call open interest among options with a lifespan of three months or less nearly doubles put open interest. No other sector is so call-skewed.

Taking a look at BJK's three largest U.S.-based holdings reveals another interesting trend. Las Vegas Sands Corp. (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Wynn Resorts, Limited (NASDAQ:WYNN) all saw notable drops in short interest during the most recent reporting period. Looking at LVS, in particular, short interest fell by more than 20% during the two most recent reporting periods. However, shorts still control close to 24 million LVS shares, which is equivalent to roughly five times the stock's average daily volume. If bearish traders continue to throw in the towel, there's still plenty of cash on the sidelines to fuel an LVS rally. 

So, at the same time brokerage firms are growing skeptical toward the gaming sector, traders in and out of the options pits are showing signs of optimism. It'll be interesting to see how this shakes out the next time there's news out of Macau. 

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