Gaming stocks under pressure

David Strow

Monday, Oct. 9, 2000 | 11:15 a.m.

A sell-off in shares of the Las Vegas Strip's largest casino operators continued this morning after a week that saw all four post declines of more than 10 percent.

Most of the selling, analysts say, is being caused by investors taking profits after months of soaring share prices.

"You're just seeing some profit-taking," said William Schmitt, gaming analyst with CIBC World Markets. "The group has significantly outperformed the broader markets for the year. The larger-cap names with exposure to Las Vegas got a little extended. That, coupled with some consumer nervousness ... drives these stocks lower."

Worst hit in this morning's activity was Mandalay Resort Group, off nearly 6 percent to $20.81 in heavy trading. Also continuing to slide were MGM MIRAGE, down $1.41 to $31.88, and Park Place Entertainment Corp., off 56 cents to $12.56.

The gaming industry sell-off began Oct. 2, as Park Place and MGM MIRAGE each flirted with 52-week highs. In the five and a half days of trading since then, Park Place has fallen $2.57 and MGM MIRAGE $6.50, both 17 percent declines. Mandalay, meanwhile, has fallen nearly 18 percent.

One of the driving factors in the sell-off is evidence that Las Vegas room price growth may be finally slowing down, analysts say. That would impact Mandalay, MGM MIRAGE and Park Place hardest, since they are the three largest hotel-casino operators on the Strip.

"(The gaming sector) was the best-performing sector in the S&P during the last quarter," said Jason Ader, gaming analyst with Bear Stearns. "There's evidence room price growth is slowing, and valuation levels are a bit extended."

Ader also said a number of hedge funds are "shorting" large-cap gaming stocks. Hedge funds are funds that try to make a profit from movement in stock prices; "shorting," or short-selling, refers to trying to make a profit when a stock falls.

Though Harrah's Entertainment Inc. has smaller exposure on the Strip, it too was being hit by the sell-off. After falling 3 percent this morning, Harrah's was trading at $23.94, off more than 12 percent since its Oct. 2 open.

Relatively shielded from the decline was Station Casinos Inc., the one gaming industry stock that didn't participate in the the run-up of gaming industry stocks in past months. This morning, Station was off just 1.2 percent to $14.44; since Oct. 2, Station's stock is virtually unchanged.

"Station is holding its ground because they're not a Las Vegas Strip company dependent on room prices," Ader said.

Though earnings season is approaching, both Ader and Schmitt said they weren't concerned that Las Vegas gaming companies will report disappointing earnings. Instead, investors may be concerned about the longer run.

"What I'm seeing is that Comdex (held in November) is weaker than normal," Schmitt said. "That shouldn't impact the fourth-quarter, but that could be a lead indicator to group business going forward. Business is pretty good, but investors may be looking at next year. You won't see the same year-over-year growth next year."

Ader, while remaining optimistic about the gaming industry, warned investors may still be in for a bumpy ride.

"There is price risk," Ader said. "I'm bullish on the future of Las Vegas, but the short-term is likely to be volatile. Those concerned about short-term prices may want to take some profits."