What happened
Shares of discretionary stocks, including Ruth's Hospitality (RUTH), MGM Resorts International (MGM 0.99%), and Melco Resorts (MLCO 0.49%) were getting hammered today as jitters over another wave of coronavirus infections spooked investors today.
There was no single news item that drove the sell-off in the steakhouse chain and the pair of casino operators. However, rising coronavirus cases in Europe and fears about cold weather seem to be contributing to the sell-off, and hit "recovery stocks" especially hard. Cases in much of Europe, including Spain and France, have been on the rise for weeks, and the U.K. is now considering another national lockdown.
While cases in the U.S. have been relatively flat in recent weeks after a second peak in July, there is a risk of another wave as cold weather drives people indoors, flu season begins, and schools reopen. Additionally, the death of Supreme Court Justice Ruth Bader Ginsburg over the weekend amplified political tensions in the U.S., especially with the presidential election approaching, and may have made another round of stimulus less likely before the election as Congress is likely to be focused on the next nominee for the high court.
As of 11:21 a.m. EDT, Ruth's Hospitality was down 10.7%, while MGM had given up 5.3%, and Melco was off 9.8%. At the same time, the S&P 500 had fallen 2.6%, and dipped into a correction, down at least 10% from its recent high at the beginning of the month.
Image source: Getty Images.
So what
All of three of these stocks are highly sensitive to the coronavirus pandemic and an economic recovery as they are dependent on social gatherings and discretionary spending.
While some other restaurant stocks have recovered from the March crash, Ruth's Hospitality shares are still down about 50% year to date. As a high-end steakhouse, the company is poorly suited to delivery or takeout, which have sustained other restaurant chains during the crisis, and it has lost the business it gets from corporate events and tourists. The company has not given investors an update since the end of July when it said comparable sales for that month through July 28 were down 47%. It also said nearly all of its restaurants had reopened. Restaurant spending has trended toward recovery in recent weeks, but another wave of infections would jeopardize that recovery.
Like other casino stocks, especially those centered on Las Vegas, MGM Resorts has been deeply impacted by the pandemic as revenue plunged 91% in the second quarter and it reported an operating loss of $1 billion. MGM's shares have recovered gradually since the March crash as the company received an investment from IAC/Interactive, a prolific holding company that has shepherded stocks like Match Group and Expedia to success, and MGM has also benefited from the growth of BetMGM, its online sportsbook, as the online gambling industry appears to be taking off. Nonetheless, operating casinos is the company's primary business and that's unlikely to recover until travel and tourism returns to normal levels.
Melco, which does much of its business in Macao and the Philippines, is sensitive to the global economy as Macao casinos generally rely on excursions from high rollers from mainland China, as well as other tourists. In its second quarter, revenue tumbled 88% and the company posted an operating loss of $370.8 million. Melco was also forced to suspend its dividend, and took on $850 million in debt to help the company weather the crisis. In addition to the threat of increasing coronavirus cases, U.S.-China tensions also appear to be rising after President Donald Trump attempted to block U.S. use of WeChat and TikTok, two popular Chinese-owned apps, though a judge has temporarily blocked that order. China threatened to respond by blacklisting foreign companies that treat China unfairly.
Now what
Discretionary stocks like the group above will continue to be sensitive to the number of coronavirus cases and other indicators on the economic recovery. With domestic travel still down by roughly two-thirds according to the TSA, it's clear that the recovery in tourism and travel that supports these stocks still has a long way to go. While this group of companies is likely to recover once the pandemic ends, the coming months are likely to be volatile as the threat of another wave looms.
