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Why U.S. Casino Stocks Plunged by Double Digits on Wednesday

By Travis Hoium – May 13, 2020 at 3:20PM

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Renewed pessimism about the U.S. economy sank gambling shares today.

What happened 

Shares of U.S. casino stocks took a nosedive on Wednesday as investors became more bearish on the gambling market's recovery. Shares of Eldorado Resorts (ERI) dropped as much as 15.9%, Red Rock Resorts (RRR 1.26%) fell up to 15%, and Boyd Gaming (BYD 1.58%) fell as much as 10%. Shares of the three stocks were down 12.5%, 13.2%, and 7.8%, respectively, at the close. 

The two other big casino operators, MGM Resorts International (MGM -0.03%) and Caesars Entertainment (CZR), were being supported today for other reasons. MGM didn't fall as much as some of its rivals because it still has exposure to Macao, although shares closed down 8.4%. Caesars' shares were buoyed by the buyout agreement it has with Eldorado Resorts and the $8.40 per share in cash that shareholders are supposed to get as part of the deal. 

Casino floor with slot machines.

Image source: Getty Images.

So what

The big news of the day is that Federal Reserve Chairman Jerome Powell gave a relatively pessimistic outlook on the economy and sent the market sharply lower. He pointed to "significant downside risks" to the economy due to COVID-19. That runs counter to the hope that the economy will come roaring back when businesses are allowed to open again, as they have been in some states. 

Another significant news event from the sector was Boyd Gaming announcing an offering of $500 million of senior notes due in 2025. The money is expected to be used for general corporate purposes -- in other words, funding the company's business while it's shut down or operations are significantly suppressed. 

Now what

The harsh reality is that we don't know what a recovery will look like when the economy and casinos start to reopen, so the market can swing wildly when prominent figures give their opinions on the future. Powell is one of the most powerful influences in public policy, so when he strikes a pessimistic tone, the market can react swiftly, and it's not surprising that casino stocks would fall sharply as a result. 

I think we're seeing that the U.S. casino market may be in the most trouble relative to other countries because COVID-19 isn't at all under control across the U.S. Meanwhile, in markets like Macao and Singapore, the virus is more controlled and casino companies see a recovery slowly taking shape over the summer and fall. That's why I think when investors are considering where to put their money in the casino industry, they should look to Asia over the U.S. That's where we're going to see a recovery first. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Boyd Gaming. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Boyd Gaming Corporation Stock Quote
Boyd Gaming Corporation
$46.95 (1.58%) $0.73
Eldorado Resorts, Inc. Stock Quote
Eldorado Resorts, Inc.
Red Rock Resorts, Inc. Stock Quote
Red Rock Resorts, Inc.
$35.23 (1.26%) $0.44
MGM Resorts International Stock Quote
MGM Resorts International
$29.98 (-0.03%) $0.01
Caesars Entertainment Corporation Stock Quote
Caesars Entertainment Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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