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Why Eldorado Resorts Stock Leaped 65% in May

By Reuben Gregg Brewer - Jun 4, 2020 at 8:15AM

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Shares of the casino operator were rocking and rolling in May. Here's why investors were so excited.

What happened

Shares of casino operator Eldorado Resorts (ERI) rose a breathtaking 65% in May, according to data from S&P Global Market Intelligence. Although a price gain of that level for an established company is astounding, at the end of the month the stock was still down 40% from the start of the year. Much of the reason why it was still down after such a rise is that, at one point in March, Eldorado Resort's share price had declined nearly 90%. 

So what

Eldorado Resorts business was effectively shut down by the government's efforts to contain the spread of COVID-19. The closure of non-essential businesses, like casinos, and the effort to get people to practice social distancing, resulted in investors fleeing the casino company's stock. That accounts for the deep downturn, which was justified in some ways given the uncertainty of the environment and the fact that revenue basically went to zero overnight.

A spinning roulette wheel

Image source: Getty Images

But non-essential businesses are beginning to reopen, including casinos. Perhaps even more important, there has been positive news on the development of a COVID-19 vaccine, which could (if it is effective) diminish the risk of congregating in groups indoors. Investors have become increasingly more positive about Eldorado's future. Thus, the swift rise.

Now what

Although it is reopening, Eldorado still has to deal with social distancing. That means that, at least for a little while, it won't be able to operate at its previous capacity levels. And some gamblers may decide to stay home rather than risk going into a group setting where COVID-19 might spread more easily.

All in, there's still a lot that has to happen before Eldorado's business is back to any semblance of normal. It helps though that regional Gulf Coast casinos appear to have done quite well as they reopened over the Memorial Day holiday weekend. Since one weekend doesn't make a trend, however, long-term investors should expect continued volatility here.   

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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