Online Gambling Stocks To Buy
Updated for 2021!
- Best Online Gambling Stocks To Invest In
- Online Gambling Stocks To Buy
- Internet Gambling Stocks To Buy
- Online Gambling Stocks To Buy
- Online Gambling Stocks To Invest In
Hundreds of thousands of people search for terms like “stocks to buy today” or “best stocks to buy” or “top stocks for 2021” every single month.
The Financial Times Stock Exchange is the second biggest spot where online gaming stocks are traded. They are commonly referred to as the Footsie 100 or FTSE 100. There’s no sure thing in the stock market, as every stock you buy is a gamble, to some degree. It’s no secret anymore that gaming, or esports, is big business and that trend should continue in 2020. That said, investors should keep gaming-focused ETFs on their watch lists for the new year. Penn National Gaming is the next of our online gambling stocks to trade. Unlike our other stocks, Penn has been around for decades. The company owns and manages traditional gaming and racing. GigaMedia is a very speculative stock, but it's perfectly positioned to reap major rewards if online gambling is legalized state by state. Just an approval in Nevada could be worth millions to this.
The appeal is understandable, but most of the articles that pop up are ones quickly written by freelancers that often don’t even invest in the stocks they pitch. They’re just writing for one-time clicks and pageviews rather than doing serious research to provide value and establish long-term relationships with their readers.
The truth is, investing is hard, and building a portfolio of top stocks to buy that beat the market is something that even financial professionals have trouble doing consistently.
In fact, after fees, only about 15% of actively-managed funds outperform the S&P 500 over any lengthy period of time:
Chart Source: S&P 500 SPIVA
For the average non-professional investor, it’s even worse. As calculated by Dalbar Inc, and charted here by JP Morgan, the average investor barely beats inflation, and vastly underperforms the S&P 500:
Chart Source: JP Morgan Guide to the Markets
That’s mainly because investors tend to buy stocks or funds during market tops when they are expensive and all the news is good, and then sell stocks and funds after they crash, when they are cheap. They keep doing that over years and the returns end up being quite bad.
Meanwhile, value investors like Warren Buffett are building up cash during euphoric bull markets, because everything is expensive and very few stocks meet their strict investment criteria. Then when a stock market crash eventually occurs and top stocks are on sale everywhere, they deploy their cash hoard and snatch up the bargains of a decade.
However, there are plenty of independent, disciplined investors that build serious wealth in the market over the long term by following similar methods. It’s simple, but not easy, to stay focused and buy high-quality companies at reasonable prices on a consistent basis.
My favorite investing platform for holding these stocks is M1 Finance.
After using it myself for a couple years now, I see first-hand how much power its software gives for easily re-balancing individual stocks, and really helps me edge out extra gains. (See my disclosure policy here regarding my affiliation with M1.)
Investment Criteria for Top Stocks
Even though markets are hard to outperform, I think individual stocks can be a valuable component of an investor’s portfolio.
As I explained in my article about investor psychology, the most important thing you can do is find the right investment strategy for your unique needs and personality. You need a strategy that performs well, but also one that you’re comfortable with and that will entice you to invest regularly.
For many people, that’s index funds. In fact, I think most people should hold some index funds, and about 50% of my own money is in index funds.
But I think dividend growth investing is a good strategy for many hands-on people as well. This means investing in companies with 10+ years of consecutive dividend growth, sustainable dividend payout ratios, and solid growth prospects.
As a strategy, it provides more reliable investment income than index funds, gives investors an opportunity to learn about a variety of businesses, and turns on the “collector’s instinct” in a lot of people that can get them excited to invest more money.
While index funds can seem distant and vague, buying and holding a collection of hand-picked dividend stocks that grow their dividends every year at an exponential pace just “clicks” for a lot of people, and builds good investing habits. Dividend growth stocks as a group have statistically mildly outperformed the S&P 500 for decades too, which doesn’t hurt.
You can buy shares of companies, those shares produce cash dividends that grow each year, and you can reinvest those dividends into more shares or you can spend them.
Best Online Gambling Stocks To Invest In
Rather than just hoping the stock price moves up rather than down, dividend investors tend to pay attention to the underlying fundamentals of the company, including the growth and safety of their dividends, and watch for strong long-term performance. This helps build good investment fundamentals because they focus on company performance more-so than fluctuations in the daily stock price.
With that said, here are the 8 main criteria I used when selecting top stocks to highlight for this article:
Criteria 1: The company benefits from long-term trends and has little foreseeable risk of obsolescence.
Criteria 2: The company has above-average returns on invested capital and a durable economic moat to keep it that way.
Criteria 3: The company has a strong balance sheet, and solid historical performance during recessions.
Criteria 4: The company is a premium provider. They compete over quality, rather than just on price.
Criteria 5: The company generally has management with long tenures and a focus on long-term results.
Criteria 6: The company enjoys profitable growth. Not growth at all costs, but a combination of sustainable growth and value.
Criteria 7: The company is trading for a reasonable valuation. It’s a fair price for an exceptional company.
Criteria 8: The company is in my personal portfolio. I’ve researched and followed it for years, and understand its various nuances.
Online Gambling Stocks To Buy
I didn’t directly include a dividend metric for this article, because I already have two popular dividend articles that I keep fresh with stock ideas:
Therefore, some of the companies in this article have rather low dividend yields, and that’s okay. The focus here is on total risk-adjusted returns.
When it comes to investing, nothing is for certain. There are no perfect stocks to buy, because there’s no way to see the future perfectly.
However, buying a diversified portfolio of high-quality companies at reasonable prices is among the most reliable ways to build wealth over the long-term.
7 Great Stocks To Buy and Hold
Here are seven companies that I think are trading at reasonable valuations that offer strong risk-adjusted returns over the next decade, and meet the above-mentioned criteria.
All of these are companies I actually own for the long-term. They’re ones I’ve researched for years, and some of which I have quite large positions in.
Some of these are likely to beat the market over time, while some may not. They have all beaten the market in the past. In terms of risk-adjusted returns, these are among the stocks I’m most comfortable holding through all market conditions along with my index funds. Always do your own due diligence before buying any company.
I published the first version of this article in 2018, and all 7 stocks that were selected outperformed the S&P 500 over the subsequent year. I recently updated this article for 2020, replacing three of the names with new ones, to try to identify some of the best stocks for 2020 and beyond.
#1) Brookfield Asset Management (BAM)
Brookfield Asset Management (BAM) is a Canadian financial firm you might not have heard of. It’s an asset manager that specializes in real assets like property, infrastructure, and renewable energy.
Their roots trace back over a century, when the company was an early developer and operator of infrastructure in Brazil.
Over the past 20 years, they have expanded into a global asset manager with over $500 billion in assets under management. They have diverse properties including gas pipelines, toll roads, data centers, solar farms, hydroelectric dams, and skyscrapers across five continents.
They hold the controlling stake in four publicly traded partnerships:
- Brookfield Property Partners (BPY)
- Brookfield Renewable Partners (BEP)
- Brookfield Infrastructure Partners (BIP)
- Brookfield Business Partners (BBU)
As a private equity firm, they make money in three main ways. First, they invest their own capital into a variety of real assets. Second, they collect money from institutional investors, invest that money on behalf of them into a variety of real assets, and collect performance fees from that capital. Third, they founded and hold large stakes in the above-mentioned publicly traded partnerships, from which they collect cash distributions, management fees, and performance fees called Incentive Distribution Rights (IDRs).
Here’s their full organizational chart. Click the image for a bigger view if you want:
Chart Source: Brookfield Investor Brochure
This structure gives them exponential growth, because in addition to their direct investments being extremely profitable, they are also benefiting from a major trend of increased institutional allocations into alternative assets, like private equity, real estate, infrastructure, and other high-performing low-liquidity investments. Brookfield’s private funds have consistently crushed benchmarks like the S&P 500.
Insiders own about 20% of the company. That’s massive insider ownership, easily an eleven-figure total, so their incentives are highly aligned with shareholders. The CEO, Bruce Flatt, has been with the company for 30 years, has been CEO for 15 years, and has overseen tremendous performance during his tenure so far.
If you invested $10,000 back in 2004, it would be worth $98,000 today compared to only $46,000 in the S&P 500 ETF, including reinvested dividends:
Chart Source: Y Charts
Despite Brookfield’s astounding results, they are not well-known and in my opinion they are still reasonably priced. Since they own cash-producing stakes in multiple partnerships and have a complex corporate structure, BAM tends not to show up well on stock screeners, and people looking at their financial statements for the first time wouldn’t see anything that stands out. In fact, they always look overvalued at first glance because their reported earnings tend to be choppy.
So, they tend to fly under the radar compared to a lot of top stocks that are household names.
The company positions itself well for recessions, because management builds up a fortress balance sheet, and then buys great assets for bargain prices from distressed sellers.
Often, companies take on too much debt, their credit ratings drop, their interest yields get too high, and then when something unexpected hurts them, they go bankrupt or need to sell assets at fire-sale prices. Brookfield buys them, refinances them to much lower interest rates thanks to their high credit rating, and makes incredible returns as they hold and expand those assets. Often, they sell those assets during bull markets for much higher valuation multiples than they paid, so that they can recycle that capital back into other distressed assets.
For example, during the 2007/2008 financial crisis, Brookfield bought a variety of undervalued shipping ports, rail infrastructure, and other global assets from a firm called Babcock & Brown that ran into too much debt and got liquidated. These assets performed tremendously as the global economy recovered.
Back when Chile was a frontier market without much investor interest, Brookfield bought cheap electrical transmission assets, expanded them for over a decade, and sold them over a decade later for a 16% annually compounded return.
When Brazil ran into a huge recession during 2014-2017, Brookfield acquired all sorts of gas pipelines and toll roads from distressed sellers that needed to raise capital, and locked in long-term favorable pricing contracts indexed to inflation.
When North American midstream companies ran into major trouble in 2015-2018 due to energy oversupply and low prices, Brookfield bought energy transportation infrastructure on the cheap.
After solar developer SunEdison collapsed into bankruptcy from too much debt to fuel overly-aggressive growth plans, Brookfield swooped in and bought lots of attractively-priced solar and wind farms from them.
In early 2018 when the retail sector was under intense pressure from the existential threat of online retail, Brookfield bought out General Growth Properties, which has a lot of best-in-class properties and high occupancy rates. Some of this they will retain as retail, while other assets they will redevelop into other types of property.
In 2020, BAM’s office towers were pressured by COVID-19, but their renewable energy and infrastructure businesses have been performing very well, and they have been continuing to add bolt-on acquisitions to their various platforms.
The point is, Brookfield management consists of contrarian investors. They buy undervalued (but premium quality) assets during times of stress, expand them, and sell them for much higher valuations during bull markets.
Although Brookfield Asset Management only pays a 1.2% dividend yield, most of the returns come from capital appreciation over time. Their various partnerships, on the other hand, offer higher yields of 3-6% with a bit less growth.
BAM Economic Moat Rating: 5 out of 5
Brookfield has a globally diversified portfolio of real assets, including utilities, utility-like regulated monopoly infrastructure, premium buildings in world-class cities like London and Manhattan, and a large collection of hydroelectric dams. These are among the types of assets with the widest available economic moats. Being so globally diversified also reduces their reliance on any one nation’s economy or politics.
In addition, asset managers benefit from high switching costs, and BAM in particular does. Private equity funds typically lock in investors for many years. And as long as BAM private funds continue to perform well, institutional investors should continue to reinvest in them when they have the opportunity to do so.
BAM Balance Sheet Rating: 4 out of 5
BAM has plenty of liquidity, and much of its debt is non-recourse to the parent corporation, but due to its complex corporate structure with multiple layers of moderate leverage, it has a moderate investment-grade credit rating from most rating agencies.
#2) Enbridge Incorporated (ENB)
Enbridge is one of the largest midstream companies in North America.
They operate a vast pipeline network that transports oil and gas from where it’s gathered to where it needs to be to keep Canada and the United states powered and warm.
Although not without occasional incidents, pipelines are safer and more cost-effective for transporting energy than the main alternative, which is by freight train.
Enbridge has virtually no direct exposure to commodity prices; they make money strictly by transporting energy. However, prolonged periods of low energy prices can reduce production volumes of oil and gas, which eventually means lower volumes and lower revenue for transporters like Enbridge.
One of the things I like best about Enbridge is their large natural gas exposure alongside their oil exposure. While oil volumes face a growing long-term threat by electric vehicles (and it’s difficult to predict how long that change will take), natural gas is projected to be a significant energy source for decades to come.
Chart Source: ENB Investor Presentation, September 2020
While renewable energy is projected to take a larger and larger market share of new energy projects, natural gas is taking market share from coal. Compared to coal, natural gas produces much less carbon dioxide, and doesn’t produce high levels of noxious pollutants like mercury. In addition, Enbridge does have a small portfolio of renewable energy assets and plans to increase it over time.
In recent years, the company made a series of acquisitions and consolidations to streamline their business model. Specifically, they acquired Spectra Energy (which gave them their big boost in natural gas exposure), and then bought out several master limited partnerships that they had large stakes in, bringing all of this into the parent company.
Enbridge currently has an 8% dividend yield and 25 years of consecutive annual dividend growth:
Chart Source: ENB Investor Presentation, September 2020
With about a high dividend yield, a dividend payout ratio that is will supported by distributable cash flows, and solid dividend growth expected going forward, Enbridge offers a high likelihood of strong overall returns for the next decade.
ENB Economic Moat Rating: 4 out of 5
Enbridge is essentially a regulated monopoly.
Their Canadian gas distribution system is a utility, while its longer-distance pipelines are regulated backbone infrastructure for North American energy transportation. Enbridge has long-term contracts with most of its customers.
However, Enbridge’s exposure to oil may be safe for a while, but faces eventual existential risk from electric vehicles. And as Enbridge grows its renewable energy portfolio, it will be competing in an area that it has fewer advantages in. Lastly, political opposition has delayed some of their planned pipelines in recent years.
ENB Balance Sheet Rating: 4 out of 5
Enbridge has one of the highest credit ratings in the midstream industry, but took on a lot of debt when they acquired Spectra Energy a couple years ago. Enbridge has since reduced its debt/EBITDA ratio from 7.0x down to about 4.5x in a short period of time by selling non-core assets, which puts them back near the lower range of oil/gas infrastructure companies.
Going forward, the company plans to maintain its debt/EBITDA ratio in the range of 4.5x-5.0x and keep its strong credit rating. Now that deleveraging is done, they have more flexibility for growth and returning capital to shareholders.
#3) Alphabet (GOOGL)
If I had to buy just one mega-cap stock today, out of Apple, Microsoft, Amazon, Google, Alphabet, Facebook, Visa, J.P. Morgan, Berkshire Hathaway, Johnson and Johnson, and so forth, it would be Alphabet.
Alphabet now has arguably the strongest balance sheet of any company in the world, with over $132 billion in cash-equivalents and just $14 billion in debt.
In addition, they are still growing revenue and earnings at a fast rate. This type of chart is called a “F.A.S.T. Graph”, and shows stock price vs fundamentals. The black line is the stock price, and the blue line is the price it would be at any given time if it was at its average price/earnings ratio on that year’s earnings, and includes two years of consensus analyst forward estimates.
Chart Source: F.A.S.T Graphs
As the F.A.S.T Graph above shows, Google’s stock price per share (black line) has been well-justified by its fundamental earnings growth (blue and orange lines).
Alphabet operates their core Google website, as well as Youtube, and the has a host of other platforms including Android, Google Adsense for other websites, Google Maps, Google Cloud, and so forth. They also have some of the leading technology in driverless technology, and are among the top tier researchers in quantum computing.
As a website creator for a decade now, literally half of Alphabet’s existence as a company, I’ve used multiple parts of Alphabet’s portfolio of services and have seen first hand how they have grown over this time.
Google was led for a while by its co-founders, but in recent years, Google CEO Sundar Pinchai was promoted to being the CEO of all of Alphabet, as the co-founders continue to step back from the company.
Alphabet should probably initiate a small dividend soon, like Apple and Microsoft both have. They generate enough free cash flow that paying a small yield would not impact their R&D efforts or affect their competitiveness in any way. Under the new leadership of Sundar Pinchai, I suspect this will happen within the next few years, but we’ll see.
GOOGL Economic Moat Rating: 5 out of 5
With both Google and Youtube, Alphabet absolutely dominates the global search market in both text and video. With Android and other portals for reaching users, they further diversify their reach and ensure continued interaction with their platforms. Their ad network on various websites benefits from the network effect; as more publishers and advertisers use the network, it increasingly becomes the standard to use online. Most major websites have Google ads on them.
All of this advertising revenue allows Alphabet to spend on super long-term research and development projects, similarly to what the normal function of a government is for (with like NASA or military R&D). Alphabet can put billions of dollars into quantum computing or driverless car testing, for example, without caring that it may not create new revenue for a decade. This gives Alphabet a serious advantage in the technological arms race.
One area where Alphabet has faced considerable competition is cloud computing. Amazon and Microsoft have proven to be stronger than Google, so far, at gaining cloud computing market share.
GOOGL Balance Sheet Rating: 5 out of 5
With over $120 billion in cash-equivalents and virtually no debt, Alphabet sets the standard for what constitutes a fortress balance sheet.
With their cash hoard and a modest issuance of debt, they could easily buy most of the companies in the world outside of the top 25 largest ones. Or, if they face an impact to their profitability, their cash hoard can fund their operations for quite a long time.
#4) HDFC Bank (HDB)
HDFC Bank is the largest private bank in India. It is celebrating its 25th year since being founded in 1994, and now has over 5,000 branches and a robust online business throughout India.
India is set to overtake China as the world’s most populous country, and still has very low (but rising) per-capita GDP. As a large emerging market, it has one of the highest GDP growth rates in the world, and is set to become one of the world’s largest economies by the 2030s.
HDFC stock is available as an ADR on the NYSE under the ticker HDB. You can see below, with data since its inception on the public markets, how fast its earnings are growing relative to a large U.S. bank like J.P. Morgan Chase:
Chart Source: Y Charts
Besides all of the normal risks that come from operating a bank, HDFC Bank’s stock has two key risks.
First of all, it is expensive, with a blended P/E ratio of over 30 at the moment. However, with earnings growing at roughly 20% per year, it actually has a rather attractive PEG ratio, which was a metric popularized by Peter Lynch that compares the valuation of a company to its growth rate.
Second, India is very reliant on oil imports, and whenever oil becomes expensive, their trade deficit widens, which tends to hurt the currency. If you’re an American or European investor, for example, then you don’t really care how HDFC Bank stock performs in terms of Indian rupees; you care how it performs in dollars and euros. If the rupee weakens vs those currencies, your returns could be reduced. On the other hand, if the rupee strengthens vs your home currency, it’s a tailwind.
Personally, I think having a stake in India as part of a diversified portfolio, and letting it run for the next decade, is a smart thing to do. I like the INDA ETF, but I also like HDFC Bank stock, particularly.
HDB Economic Moat Rating: 4 out of 5
HDFC Bank has built up significant economy of scale within India, which gives it operational advantages over competitors. In addition, banks tend to have annoying switching costs, meaning that once customers pick a bank, they don’t change too frequently.
HDB Balance Sheet Rating: 4 out of 5
HDFC Bank maintains strong creditworthiness, but as a bank in an emerging market, it can be subject to more severe currency fluctuations or other crises compared to what is historically normal for developed markets.
#5) Itochu Corporation (ITOCHU)
Japan has a set of large trading conglomerates that are involved in resourcing commodities, providing logistics services, and running various businesses. Among them, Itochu Corporation has been one of the strongest performers.
For U.S. investors it can be purchased OTC as an ADR under the ticker ITOCY, or it can be bought on the Tokyo Stock Exchange.
Here is a look at how diversified their product mix is. They are taking a hit in 2021 due to the pandemic (most of their 2021 reporting year is actually within the 2020 calendar year), but their underlying business remains strong.
Chart Source: Itochu Corporation 2020 Annual Report
They trade at a P/E ratio of below 10, and with a lot price/book ratio, despite strong growth over the past decade:
Chart Source: F.A.S.T. Graphs
Itochu Economic Moat Rating: 5 out of 5
Itochu has a web of assets owned throughout Japan and the world, and is both vertically-integrated and widely diversified. This gives it a very entrenched position with the Japanese economy, along with global reach.
Itochu Balance Sheet Rating: 4 out of 5
Japanese trading companies including Itochu were highly-leveraged decades ago during the Japanese bubble, but over the past decade have strongly deleveraged. And among Japanese trading companies, Itochu has among the lowest leverage ratios.
#6) JD.com (JD)
JD can in some ways be considered one of the “Amazons of China”. They’re a large ecommerce company, and have spent the past decade building out a massive set of logistics infrastructure across China for fast delivery. Unlike Alibaba, JD controls most of its own sales, which reduces margins but gives it more control over quality.
Their revenue growth continues to grow like wildfire, and their valuation is much lower than it was early on. The purple line in this chart shows quarterly revenue, and the orange line is the price/sales ratio.
Overall, I view JD as a “set it and forget it” stock for a 5-10 year holding period. There are jurisdictional risks for having Chinese equity exposure, so investors can keep their position size reasonable to defend against tail risks.
JD Economic Moat Rating: 4 out of 5
JD’s logistics distribution infrastructure is unparalleled in China, which gives them massive reach over upstart e-commerce companies. They do, however, face Alibaba as a major competitor, and the Chinese government has a lot of power over the corporate sector, which keeps JD from having a full 5/5 score.
JD Balance Sheet Rating: 5 out of 5
Like many growth companies, JD has more cash and short-term investments than debt, which gives them a fortress financial position, and plenty of flexibility to deploy capital where needed to continue their fast growth rate.
#7) Discover Financial Services (DFS)
Discover Financial Services was spun off from Morgan Stanley in 2007 and currently operates a lean online bank as well as two significant payment networks.
The company owns the well-known Discover brand, which is one of the four main credit card networks along with Visa, Mastercard, and American Express.
Over the past decade, Discover has built up an online bank as well, with a diverse range of offerings including checking accounts, savings accounts, personal loans, student loans, and home equity loans to consumers with high credit scores.
They also own the Pulse payment network (an interbank electronic funds transfer network) and Diner’s Club International (a charge card brand).
Discover is widely accepted in the United States, but not nearly as accepted internationally as Visa, Mastercard, and American Express. This is a downside for obvious reasons, but also is a source of potential growth for the company if they can push outward internationally like the other three main card networks.
Importantly, Discover is both a bank and a payment network. Visa and Mastercard focus purely on operating payment networks, and do not carry any credit card loans on their own books (the issuing banks do, like JP Morgan, Bank of America, and others that issue Visa and Mastercard credit cards). Discover and American Express, in contrast, are combined payment networks and banks, and thus operate the payment networks and hold the loans on their own books, so they take on credit risk but earn substantial interest income from this lending activity.
Discover has been exceptionally well-managed. David Nelms served as CEO from 2004 until 2018. The new CEO, Roger Hochschild, was previously the president and chief operating officer (COO) from 2004-2018. The two of them oversaw Discover’s transformation from a small spin-off credit card company to a more diversified bank.
Here, for example, is a snapshot of Discover’s transformation from when it went public in 2007 until ten years later in 2017:
Chart Source: Discover Financial Services 2018 Annual Shareholder Meeting
The numbers continued grinding higher in 2018 and 2019, on top of this first decade of explosive transformation, and the company has weathered 2020 well.
Hochschild has been with the company since 1998 and still is a fairly young executive. These long tenures help ensure that management is aligned with shareholders with a focus on long-term performance rather than quarterly results. For a second-tier card network like Discover in terms of market share, it’s important to have exceptional management.
Discover consistently has the highest consumer satisfaction among credit card issuers. Their customer service is industry-leading, and has been responsible for their high rates of customer retention.
It’s important to note that Discover might be the most volatile company on this list of seven stocks to buy due to their large credit card loan portfolio. Credit card debt has among the highest default rates out of various types of debt during economic recessions, but allows the bank to generate upwards of 20% annual returns on equity during most normal years, which is outstanding.
However, Discover consistently passes Federal Reserve stress tests every year. The Fed analyzes the company to ensure they have enough capital to withstand an extreme recession similar to what happened during the 2007/2008 global financial crisis. Although their credit card loan losses would be substantial, the company makes up for it by having less leverage and extra capital reserves compared to other types of banks. Indeed, they held up quite well during the 2007/2008 financial crisis even though it was a rough time for them.
Discover generally trades at low stock valuations, which makes its share buybacks very lucrative. It’s one of the companies where I think share buybacks actually make a lot of sense for shareholders. The company has reduced the number of shares outstanding from 543 million in 2011 to 306 million today by buying back 5-8% of their shares back each year. This boosts earnings per share (EPS) growth at a much faster rate than company-wide net income growth.
The company has grown its dividend for 9 consecutive years, and currently pays a 2% dividend yield with a low payout ratio below 25%.
DFS Economic Moat Rating: 4 out of 5
Credit card networks naturally have very wide economic moats due to the network effect. The more cardholders that want to use the card, the more merchants there will be that are willing to accept the card as payment. And the more merchants that accept the card there are, the more users will be happy to use the card, creating a virtuous cycle. This is somewhat mitigated by Discover’s relatively low international acceptance.
Banks also naturally have high switching costs; once consumers put their money in they rarely go through the hassle of switching. Discover’s lean online banking business allows it to give some of the higher interest rates in the industry, which combined with its top-notch customer service should help it retain and grow market share.
DFS Balance Sheet Rating: 4 out of 5
Discover’s high concentration in credit card lending makes it susceptible to economic recessions, meaning under the current business model it will never have a fortress balance sheet that gives it a 5/5 rating.
However, Discover has conservative lending standards and very high levels of capital reserves to cover projected loan losses during a recession as severe as the 2007/2008 financial crisis. In addition, they generate much higher returns on equity than banks that focus mainly on mortgage lending.
Asset Allocation vs Hot Stock Selection
Asset allocation, meaning the long-term strategy for how you invest in various asset classes, is more important for most investors than individual stock selection.
Focusing all your time on trying to pick the top stocks usually results in missing the forest by looking for the trees.
Getting the big questions right, like how much of your net worth should be in domestic equities, how much you should invest in international stocks, how much to invest in bonds or precious metals, how reliably you re-balance your portfolio, and how consistently you save money to invest, are likely to generate the bulk of your returns and portfolio growth compared to spending a lot of time looking for the top stocks to buy.
Everyone has that colleague at work that talks about how their portfolio did this quarter, or about some hot stock they recently bought. You know the type of guy. Ten years later he’s still talking about trading a couple thousand bucks in stocks around but is he rich yet?
It doesn’t matter what stocks you pick if you don’t a) diligently put capital to work month after month with a high savings rate and b) focus on long-term results and building wealth.
There are some highly-skilled traders out there that make a lot of money in the short term by devoting their full-time job to it, but most of the people who get rich from the stock market are people with day jobs that diligently save and invest money every paycheck.
They keep buying and holding dividend stocks, index funds, real estate, or other high quality assets with a focus on long-term results.
And as I said before, I’m in favor of buying individual stocks, at least for some people. I think it’s a valuable practice to be able to understand and value a business, and evidence shows that some value-oriented strategies with a long-term focus do indeed outperform the broader market.
But it’s important not to get obsessed with it, or concentrate too heavily in any individual hot stock.
Final Thoughts
My purpose for writing this article is to point out the problems with short-term thinking and hunting for hot stock tips, while also indeed giving some real ideas for stocks to buy.
If you approach investing with a disciplined savings rate, proper investment criteria, and reasonable expectations, you can do well.
Some stocks to buy on the list are high-valued fast-growing companies, while others are under-valued moderate-growth value stocks. But these are all real cash-producing companies with market-beating historical returns, superior returns on invested capital, and wide economic moats, that don’t rely on much speculation for good returns going forward.
If you liked this article, be sure to join the free newsletter. It comes out every 6 weeks, and gives investors macroeconomic updates, stock ideas, and shows my personal portfolio changes.
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Further Reading:
Updated on September 14th, 2020 by Bob Ciura
As the saying goes, the house always wins. Casinos operate strong business models, as casinos earn a virtually guaranteed profit from the sum of the bets they receive. The relatively attractive economics of casinos make the industry worthy of a closer look.
Investors may be particularly intrigued by the earnings growth and dividends of the major casino stocks. The 4 major publicly-traded casino stocks all pay dividends to shareholders, but they are far from the safest dividend stocks around.
If you are looking for a safer basket of dividend growth stocks, consider the Dividend Aristocrats. They are an elite group of 65 stocks in the S&P 500 Index with 25+ years of rising dividends.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with important financial metrics such as dividend yields, P/E ratios, and dividend payout ratios) by clicking the link below:
Click here to download your Dividend Aristocrats Excel Spreadsheet List now.
Casinos are not without a fair amount of risk. Casinos are highly vulnerable to recessions, as consumers typically cut back heavily on gaming when the economy enters a downturn. The four major casino stocks saw their earnings collapse during the Great Recession. A similar impact has taken place to start 2020 due to the coronavirus crisis, which has battered the casino industry.
We have analyzed the major casino stocks in the Sure Analysis Research Database, which ranks stocks based upon the combination of their dividend yield, earnings-per-share growth potential and valuation to compute expected total returns. In this article, we will compare the expected 5-year total annual returns of the four major casino stocks.
Table Of Contents
For this article, stocks are ranked in order of least attractive to most attractive. While 5-year expected returns are incorporated in the rankings, we have also utilized a qualitative screen based on balance sheet strength and overall business quality.
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Casino Industry Overview
The casino industry is in severe distress right now. The spreading coronavirus and resulting global recession have taken their toll on the casino stocks. The large U.S. casinos are heavily reliant on Macau, the largest gaming market in the world and the only market in China where casinos are legal. As a result, these stocks are very sensitive to any developments that affect the gaming activity in Macau.
This was a significant concern several years ago. In 2014, China initiated an anti-corruption regulatory crackdown, which greatly reduced the gaming activity in the area. Fortunately for the casinos, the downturn lasted for approximately two years and gaming activity in Macau recovered thereafter. Then the gaming activity in Macau faced another headwind, namely the trade war between the U.S. and China.
This headwind lasted for only about a year but now Macau is facing its strongest challenge ever, the outbreak of coronavirus, which has caused a huge hit in the gaming business. Casinos were shut down for an extended period due to the coronavirus. Visa restrictions have also added to the decline in gaming activity in Macau.
As a result, gross gaming revenue in Macau plunged 94.5% in August, compared with the same month last year. Gross gaming revenue in Macau declined 81.6% through the first eight months of 2020. The high sensitivity of casino stocks to all the developments related to China and their pronounced cyclicality means that investors should pick casino stocks carefully.
Top Casino Stock #4: Wynn Resorts (WYNN)
Wynn Resorts owns and operates Wynn Macau and the Wynn Palace in Macau, as well as Wynn Las Vegas and Encore in Las Vegas. Since Wynn Resorts is highly leveraged to the gaming activity in Macau, it saw its earnings collapse and it cut its dividend by 62% in 2015-2016 due to the Macau downturn that was caused by the anti-corruption regulatory crackdown in the area. But as Macau strongly recovered in the last three years, Wynn Resorts returned to growth.
Unfortunately, the company is now facing the headwind of coronavirus in all the regions in which it operates. Wynn Resorts reported earnings results for the second quarter on 8/4/2020. Revenue declined 95% year-over-year to $85.7 million, which was $190 million less than expected. The company lost $6.14 per share in the quarter, missing estimates by $1.23. Adjusted property EBITDA was a loss of $322.9 million compared to estimates of a loss of $314 million. This compared unfavorably to adjusted EBITDA of $480.6 million in the second quarter of 2019.
Results for Wynn Resorts were once again severely impacted by the COVID-19 pandemic as properties in Macau were closed for 15 days. Las Vegas operations didn’t open until June 4th.Wynn Palace revenues declined 98.6% as a result. Revenues for Wynn Macau decreased 97.8% while Las Vegas decreased 86% year-over-year. Wynn Resorts suspended its dividend in an effort to conserve capital. Consensus estimates call for a loss of $11.52 per share for 2020.
On the bright side, casinos are gradually reopening, and Wynn Resorts seems to have ample room to grow in the upcoming years thanks to its promising growth pipeline.
Source: Investor Presentation
The company has made progress in the design of Crystal Pavilion in Macau, which will be a major tourist attraction. In addition, Encore Boston Harbor opened in June-2019 and has exhibited strong performance so far so it has promising growth prospects ahead thanks to expected ramp-up in activity.
Moreover, the company has been caught off guard, with total current and long-term debt outstanding of $12.78 billion and cash and cash equivalents of $3.80 billion. Therefore, the stock is carrying an increased amount of risk right now due to its high level of debt.
However, we believe that the coronavirus crisis will not last beyond this year and we view the long-term growth prospects of the company as intact. We expect 4% annual EPS growth through 2025. Using the company’s current assets, return on assets of 5.6% over the last decade and share count, we believe Wynn Resorts has earnings power of $1.89. We will use this figure to calculate fair value and projected return.
Based off of the earnings power estimate for 2020, the stock is currently trading at a P/E ratio of 44, which is higher than its historical average of 30.1. However, the stock traded at abnormally high P/E ratios in some years due to depressed earnings in those years.
For instance, the abnormally rich valuation of the stock during 2015-2017 resulted from the market’s view that the downturn in Macau was temporary. Our target P/E ratio of 18 reflects uncertainty regarding Macau and the coronavirus. If shares reverted to our target P/E by 2025, then valuation would be a 16% headwind to annual returns over this time period.
If the stock reaches our fair valuation level over the next five years, it would reduce shareholder returns by 16%, effectively wiping out earnings growth and dividends over that time period. The stock is markedly volatile due to its high debt load, which is an added risk factor.
As a result, only those who can stomach extreme stock price volatility and have confidence in the ability of Wynn Resorts to navigate through the current crisis should consider buying the stock.
Top Casino Stock #3: MGM Resorts (MGM)
MGM Resorts owns and operates casinos, hotels and conference halls in the U.S. and China. The company has the least exposure to Macau in this group of stocks. As a result, it suffered much less than its peers from the trade war between the U.S. and China and the protests of people in Macau a few months ago.
However, the company is highly exposed to the outbreak of coronavirus, just like its peers. Due to the rapid spread of the coronavirus, MGM Resorts suspended all its casino operations in Las Vegas on March 16th and did not accept hotel reservations for the dates prior to May 1st. The company also closed its casino in Maryland.
In late July, MGM Resorts reported (7/30/20) financial results for the second quarter of fiscal 2020. The company began reopening its U.S.properties in the quarter but its revenue plunged -91% over last year’s quarter due to the suspension of the operations of the company in the U.S. and a collapse in gaming revenues in Macau caused by travel restrictions and social distancing.
Source: Investor Presentation
As a result, MGM Resorts switched from a profit of $0.23 per share in last year’s quarter to an adjusted loss of -$1.52 per share.
Due to the unprecedented downturn that has resulted from the pandemic, MGM Resorts cut its dividend by 98% in April. Moreover, in May, it issued $750 million of 5-year bonds at 6.750%. The high interest rate reflects the desperation of the company for funds and the high debt load of the company. Net debt is $20.0 billion, which is nearly twice the current market cap of the stock.
On the positive side, on August 20th, 2020, IAC (IAC) reported a 12% stake in MGM Resorts for approximately $1 billion. IAC has a portfolio of brands and digital expertise, which is expected to help MGM Resorts leverage its digital assets. IAC will join the Board of Directors of MGM Resorts. The stock jumped 12% on the announcement.
Nevertheless, due to the headwind of coronavirus, along with a huge debt load, shareholders should not expect a material boost in dividends and share repurchases for the foreseeable future. That said, the company has a positive long-term outlook for conventions and sports betting in the domestic market, as well as the ramp-up of the recently-built MGM Cotai resort, MGM Springfield, and Park MGM.
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As soon as the coronavirus crisis comes to an end, MGM Resorts will benefit from these growth drivers. The company will also enhance its earnings growth via its initiative “MGM 2020”, which aims to expand margins by reducing operating costs and enhancing the efficiency of the company.
Due to the headwind from coronavirus, we expect MGM Resorts to report a net loss in 2020. Earnings-per-share are expected to gradually turn positive, with expected annual growth of 5% through 2025. After the massive dividend reduction, returns from dividends will be negligible until the full dividend is restored. Finally, a contracting valuation multiple could be an additional headwind for shareholders. Overall, we expect negative total returns in the mid-single-digits over the next five years.
Top Casino Stock #2: Melco Resorts (MLCO)
Melco Resorts owns and operates casino gaming and entertainment casino resort facilities in Asia. As Melco Resorts is the most leveraged to the gaming activity in Macau in this group of stocks, it is the most vulnerable company to the downturn in the area due to the outbreak of coronavirus.
Melco Resorts will greatly benefit as the US slowly returns to a more ‘normal’ level of activity as COVID-19 fears and cases hopefully decline. A COVID-19 vaccine would likely be a major boost for the company.
In 2019, Melco Resorts grew its revenue 11% and its earnings per share 15%, primarily thanks to its strong performance in the mass market table gaming activity. But conditions have predictably reversed, with second-quarter revenue declining 88% and adjusted property EBITDA declining to a loss of $156.3 million.
Source: Investor Presentation
As soon as the effect of coronavirus begins to fade, the company has promising growth prospects ahead. It will benefit from the ramp-up of activity in its Morpheus Resort, which opened in mid-2018, and attract an increasing number of visitors in Cotai thanks to improvements in mass transportation.
Melco Resorts is also expanding its City of Dreams in Macau and is taking steps to open an integrated resort in Yokohama, Japan. All these initiatives are likely to be significant growth drivers as soon as Macau returns to normal.
On the other hand, due to its extreme leverage to gaming activity in Macau, the stock is highly vulnerable to any negative development related to coronavirus. Therefore, despite the promising growth prospects, we hold modest expectations for Melco, due to its extreme leverage to the activity in Macau.
It is worth noting that the gaming activity in the area was facing another headwind, protests from civilians, before the outbreak of coronavirus. Overall, we expect 2% average annual growth in earnings per share over the next five years.
The company is expected to post a significant loss for 2020. Earnings-per-share are expected to recover to $0.11 in 2021 and $1.08 in 2022. In a normalized economic backdrop, this would mean the stock trades for a P/E ratio of approximately 18, based on 2022 earnings. We view the stock as fairly valued.
Therefore, shareholder returns will be fueled by earnings-per-share growth. The stock had a 4%+ yield recently, but the company has suspended its dividend for the foreseeable future in an effort to preserve cash. Therefore, total returns are expected at just ~2% per year until the dividend is restored.
Given its healthy balance sheet, the company is likely to resume paying dividends once the coronavirus crisis ends. On the other hand, income-oriented investors should remain cautious, as the company is highly vulnerable to economic downturns and is very sensitive to any casino-related policy change in China and the ongoing coronavirus crisis.
Top Casino Stock #1: Las Vegas Sands (LVS)
Las Vegas Sands is a leading developer and operator of integrated resorts in the U.S. and Asia. Due to the outbreak of coronavirus, Las Vegas Sands is facing strong headwinds in Macau and in the U.S. As mentioned above, gaming activity has collapsed in Macau. In addition, due to the propagation of the virus in the U.S., all the casinos in Las Vegas were closed for a considerable period. As a result, Las Vegas Sands will incur a significant hit to its earnings this year.
On the other hand, beyond this year, Las Vegas Sands has promising growth prospects ahead. As Japan legalized casino gambling three years ago, Las Vegas Sands has announced that it intends to open integrated resorts in Tokyo and Yokohama. The company is the favorite bidder in this contest, which is expected to be a significant growth driver, though it will take a few years until the company earns a license and builds its new properties in Japan.
Not only do we see potential for strong earnings growth along with a high dividend yield for this stock, Las Vegas Sands also earns the top ranking because of its strong balance sheet and healthy liquidity.
Source: Investor Presentation
Furthermore, Las Vegan Sands continues to pursue growth by expanding and upgrading its Macau properties. The company launched Four Seasons Tower Suites Macao last year and it expects to perform its grand opening this year while it also expects to launch the Londoner Macao within 2020-2021 and expand Marina Bay Sands in Singapore.
In addition, Las Vegas Sands will benefit from the debut of the light rail system connecting Macau to the entire China rail network. This project will significantly increase the traffic to the casinos in Macau. Thanks to all these growth drivers and given the suppressed earnings expected this year, we expect the company to grow its earnings per share by about 4% per year over the next five years.
Las Vegas Sands stock previously offered a hefty dividend of $3.08 per share annualized, but the company suspended its dividend in 2020 amid the coronavirus pandemic. If the company were to reinstate its dividend at the same level, shares would yield nearly 6% at the current stock price.
The company is expected to see earnings dry up in 2020; our estimate of its full earnings power in a normal economy is annual earnings-per-share of $3.20. Based on this, the stock has a price-to-earnings ratio of 16.6, which is lower than our fair value estimate of around 17.0. Therefore, we see Las Vegas Sands stock as the only undervalued casino stock.
We also believe Las Vegas Sands has the strongest balance sheet. This means it is likely that the company will easily navigate through the ongoing coronavirus crisis and will enjoy a strong recovery whenever the headwind disappears from the horizon.
Final Thoughts
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Gaming activity in Macau enjoyed a strong recovery from 2017-2019. But the coronavirus pandemic brought the recovery to a halt. Macau is now facing another severe downturn, due to the outbreak. The same is true for the U.S. as well, as the coronavirus crisis has resulted in weak demand. As a result, all the above casino stocks are going through a fierce downturn right now.
Melco Resorts seems the least attractive choice whereas Las Vegas Sands has by far the most attractive risk/reward profile. Wynn Resorts and MGM Resorts offer a lower expected return than Las Vegas Sands. Additionally, we prefer Las Vegan Sands for its stronger balance sheet, which is paramount during severe downturns.
While we expect the coronavirus crisis to end later this year, no one is absolutely sure when this crisis will end. To provide a perspective for the severity of the downturn, all the U.S. casino companies asked Congress for emergency financial help, as several industries have been impacted by coronavirus. Certain gaming regions like Las Vegas are preparing to reopen, which would be a major positive step for the casinos.
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That said, casino operators will likely see profits evaporate and report significant losses, at least for one quarter but potentially for 2020. There is also the potential for further dividend cuts or suspensions across the industry, if the crisis continues for the remainder of 2020.
It is thus critical for investors to make sure that their companies can easily endure a prolonged crisis without being devastated. Therefore, the superior balance sheet of Las Vegas Sands is a crucial parameter and helps explain the fact that the market has punished Las Vegas Sands much less than its peers in the ongoing downturn.