MGM Mirage (MGM) is looking attractive
The stock market resembles Las Vegas in many respects. Despite our fundamental and technical analysis, picking a winning stock is sometime a matter of luck and timing. Similar to gambling, one can be on a winning streak and then all of the sudden, luck will turn for the worse. After last week’s market decline, we could use a few days in Las Vegas. At least we would have fun losing our money.
Just like other sectors, the travel and leisure stocks are taking it on the chin for fear the economy might be headed into a recession. Let’s take a closer look at MGM Mirage (MGM).
Great Business: MGM operates some of the most well know hotels and casinos in Las Vegas, N.J, Michigan and Mississippi. The majority of their properties reside in Las Vegas. These include Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, TI, New York-New York, Excalibur, Monte Carlo, Circus Circus Las Vegas (source: mgm.com). Basically, MGM own half of the casinos on the Las Vegas strip.
If you have visited Las Vegas recently, it is easy to see how these casinos are making so much money. They entice visitors with cheap rooms, fine food and entertainment. Beside eating and watching shows there is not much to do there except gamble. In Vegas, it is all about the money. If you got the money, you can get anything you wish. The dream of winning that big hand or that jackpot keeps people coming back.
Valuation Opportunity: We have always like MGM, but the stock has always too expensive for our taste. This current market meltdown might finally give us a chance to buy at a decent price. Trading below $70 per share with a P/E of 31, this stock is cheaper than LV Sands (LVS) and Harrah’s (HET).
We are watching this stock closely. If we can acquire MGM at around $65 per share, we believed the chance of superior return is very much obtainable. Even in the terrible market, the risk/reward would be compelling at $65. MGM’s growth continues to remain strong (see their balance sheet). The hotel vacancy is low and very much in demand due to their prime location. This advantage should allow MGM to continue delivering great results.
One of the factors we like about Las Vegas is it is a year round destination. Unlike other travel destinations, Las Vegas always has a steady stream of people visiting. Another thing, when people visit this city, they bring a lot of cash hoping to win. For the vast majority of visitors, the money they bring will not make it back home. We fully expect travel and leisure to be strong this year. Beside, if the market continues to bleed, more investors like us will likely need to visit Vegas to just get away.
Economic Factors: In our view, the stock market is going through a nasty correction. Some experts are even arguing this correction is long overdue as we can’t expect the market to keep appreciating without bumps. These market corrections allow investors to take a breather and reset people’s expectation. In the long run, it is a healthy thing. In the short term, it is a necessary pain we must bear as part of investing.
Looking at the bigger picture, the economy does not appear to be in trouble. The job market is still strong and the housing market is starting to stabilize. Interest rate remains attractive so consumer spending should continue. In fact, given the current situation, the Feds might actually need to cut short term rates to prevent the economy from slowing too fast. A rate cut could actually help the stock market.
