Why Are Casino Stocks Falling on Monday?

After rallying hard since the beginning of October on strong Golden Week data, shares of Wynn Resorts, Limited (NASDAQ:WYNN), Las Vegas Sands Corp. (NYSE:LVS), and MGM Resorts International (NYSE:MGM), and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) are retracing. Let’s take a closer look at what’s causing investors to sell and see if the smart money agrees with the market.

In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8000 funds in operation at present, Hedge fund experts at Insider Monkey look at the aristocrats of this group, around 730 funds. Contrary to popular belief Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to outperform the market on the long side of their portfolio. In fact, the 15 most popular small-cap stocks among hedge funds returned 102% since the end of August 2012 and beat the S&P 500 Index by 53 percentage points (see more details here).

Casino stocks Wynn Resorts, Limited (NASDAQ:WYNN), Las Vegas Sands Corp. (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) have rallied hard since October 1 as various research firms have noticed more visitors frequenting gaming tables in Macau during the Golden Week. China’s regulator to Macau also recently said that the central government would support Macau’s economy in ‘all aspects’. Since China’s central government decides gaming demand through visa regulations and financial controls, many investors became bullish and felt that Macau demand had troughed. Macau’s gaming revenue is slowly becoming less bad as well, as September gaming revenues declined by 33% year-over-year, while August revenues declined by 35.5% year-over-year.

China is also showing some signs of reverting back to older ways. The head of the micro economy research department of the State Council’s Development Research Center recently said, “keeping relatively high growth of infrastructure investment is key to stabilizing economic growth”. Some also think there could be a lull in the government’s anti-corruption campaign as many high profile officials have already been removed. If China spends more on infrastructure, its growth rate will be faster and more people will visit Macau. If the anti-corruption campaign slows down, more high rollers could visit. 

Casino stocks are currently falling, however, after Macau’s government summoned casino executives for a meeting on Sunday and demanded that casino operators comply with its regulations. In a statement from Macau’s government website, the government says it has ‘no plan to make any changes lightly’ and regretted certain opinions about its labor and gaming plans. Macau summoned the executives after Steve Wynn decried Macau’s limits on gaming tables in a conference call, and said that, “in my 45 years of experience, I’ve never seen anything like this before”. Wynn’s comments likely didn’t go well with the government, and the government responded with stern words. Keeping in the government’s good graces is vital for Macau casino operators, as some casino operator’s licenses will need to be renewed in 2020 or 2022. In the next page, we analyze hedge fund sentiment toward the four stocks.

According to our data, the smart money is bullish on Wynn Resorts, Limited (NASDAQ:WYNN). Of the 730 elite funds we track, 35 funds owned $1.24 billion of Wynn Resorts, accounting for 12.40% of the float, at the end of the second quarter, up from 25 funds holding stakes worth $936.81 million a quarter earlier. Mason Hawkins‘ Southeastern Asset Management owned 7.11 million shares at the end of the second quarter, up by 56% from the prior quarter.

Hedge funds are less optimistic about Las Vegas Sands Corp. (NYSE:LVS), as nine funds held stakes in the company with an aggregate value of $265.44 million, equal to just 0.60% of the company at the end of June. This is down from 24 funds with holdings valued at $390.17 million on March 31. Matthew Hulsizer‘s PEAK6 Capital Management upped its ‘Put’ position by 178% to hold options underlying 1.51 million shares, while also increasing its ‘Call’ position by 157% to cover 1.29 million underlying shares in the second quarter. Las Vegas Sands pays a 5.23% dividend yield and trades at a forward P/E of 19.4.

The smart money kept its position in MGM Resorts International (NYSE:MGM) stable in the second quarter. The number of funds long the stock was stable at 58 from the prior quarter, while the total value of the funds’ holdings in MGM declined slightly to $1.74 billion worth of the company’s shares (representing 16.90% of the total number of shares) from $1.76 billion at the end of the first quarter. Daniel Och‘s OZ Management raised its holding by 51% to 11.22 million shares.

Hedge funds were mixed on Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) in the time period from March 31 to June 30. Although the number of funds decreased to 23 from 25, the total value of their holdings in the stock increased to $522.8 million (or about 4.90% of the total number of shares) from $462.87 million.  Matt Sirovich And Jeremy Mindich’s Scopia Capital owns 5.18 million shares.

Disclosure: None