Time to Roll the Dice on Casino Stocks?

Casino stocks Wynn Resorts, Limited (NASDAQ:WYNN) and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) could present opportunities for bullish traders

Oct 13, 2016 at 2:39 PM
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It's been a solid 2016 for casino stocks, yet the gaming sector remains largely underloved -- which could point to an opportunity for traders looking to profit from a sentiment shift. Among the stocks that could be ripe for contrarian bulls are Wynn Resorts, Limited (NASDAQ:WYNN) and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL).

Of the nine stocks under our "Gaming" umbrella, a whopping 89% are trading above their 80-day moving average -- the highest of any sector that we track. Still, just 50% of analysts offer up "buy" or better endorsements, according to Schaeffer's Senior Quantitative Analyst Rocky White, and the median short-interest ratio of 4.50 indicates roughly a week's worth of pent-up buying demand, should shorts hit the bricks.

WYNN is down 2.5% at $94.05 today, as the stock dips on broad-market headwinds. Still, the shares have rallied nearly 37% in 2016, and since touching an annual high of $109.50 about a month ago, have pulled back to test their 160-day moving average. The last four times WYNN flirted with this trendline, the stock averaged a 3.2% return over the next 21 days, per White.

WYNN chart Oct 13

Despite the equity's impressive year so far, analysts remain unconvinced, with just four out of 14 offering up a "buy" or better endorsement. In the same vein, short interest still accounts for 12.7% of the stock's total available float, indicating there are plenty of skeptics on the sidelines. Should WYNN once again bounce off trendline support, a round of upgrades or a short squeeze could add fuel to the stock's fire.

MPEL has rallied nearly 28% just in the past three months, after a bounce off the $12 level. Prior to today's 3.2% dip -- which has MPEL flirting with $15.78 -- the casino stock had outperformed the S&P 500 Index (SPX) by a healthy 32.5 percentage points during the past 60 sessions. Further, MPEL's recent ascent helped the shares break north of a long-term channel of lower highs and lows.

MPEL chart Oct 13

Still, Wall Street remains wary of MPEL, with just 25% of eight analysts doling out "buy" or better recommendations. Plus, at the security's average daily trading volume, it would take more than six sessions for shorts to buy back their bearish bets -- plenty of fuel for a short-covering lift.

While MPEL options volume is typically light on an absolute basis, these traders have been doubling down on bearish bets, despite the stock's recent ascent. According to data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), nearly six MPEL puts have been purchased for every call in the past two weeks. The resultant put/call volume ratio of 5.93 is higher than 92% of all others from the past year, pointing to a bigger-than-usual affinity for long puts over calls.

In conclusion, the casino sector could be ripe for more upside, should analysts, short sellers, and option bears abandon ship. Keep an eye on WYNN and MPEL, along with this outperforming sector peer.

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