With investing, it's just as important to learn from our mistakes as it is our successes. As the Fool contributor who has taken responsibility for covering the gaming sector, I take pride in providing our readers with accurate and hopefully fair analysis of the sector. And while I enjoy patting myself on the back as much as anyone for good picks (cough cough, Melco Crown (Nasdaq: MPEL)), I will take responsibility when I'm wrong, too. Today, I'll review how it all went wrong with my short of MGM Resorts (NYSE: MGM).
The pick and why I made it
I haven't been high on MGM Resorts since I started writing for The Motley Fool last summer because its business is concentrated in a weak Las Vegas market. Not only was Vegas gaming revenue down dramatically from pre-recession highs, new casinos like City Center and Cosmopolitan were flooding the market with new rooms.
So I decided it was time to take my first-ever short position when I saw gaming revenue decline in Las Vegas during January and February combined with Wynn Resorts (Nasdaq: WYNN) increasing casino revenue year over year. With that combination, someone had to be losing gaming revenue, and my bet was it was MGM and Caesars Entertainment.
The market tells me otherwise
So when results were announced and I saw casino revenue was down nearly 5%, I thought I had made the right call. But the market saw a 13% jump in revenue per available room as a reason that Las Vegas was on a comeback. The stock jumped after earnings and has continued to climb ever since.
It doesn't hurt that MGM was releasing details about its Macau IPO at the same time, giving traders a reason to jump into the stock. Of course, the IPO won't actually generate cash to pay off debt since MGM is buying shares. But it will allow MGM to pull Macau operations onto its balance sheet, making a terrible balance sheet look better, even if the Macau operation isn't all owned by MGM.
What I learned
So in the end, the market proved me wrong. I closed my position at a loss (shockingly my first loss on a closed position in a gaming stock) and am left contemplating what went wrong. My thesis was correct -- that casino revenue would be down -- but I failed to see the impact room revenue would have on the stock.
I still think that MGM is way overvalued based on its operations, so I don't regret the trade, but I understand that the market is thinking otherwise, and in the end, that's what really matters. Sometimes we don't see eye to eye with the market, which can often make for a great buying opportunity, but it worked against me this time.
When I bought Melco Crown a few months ago, based on its low multiples relative to competitors, the market eventually realized the same thing, and the stock has led gaming stocks higher in 2011. Using the same logic, I think Las Vegas Sands (NYSE: LVS) is the best buy in gaming (as I've outlined in the article linked above), but only time will tell if the market will agree with me ... this time.
As always, I'll continue to lay out why I take the positions I take in gaming stocks, and I'll review the performance periodically so you know I'm keeping it honest, like I am today.
Be sure to keep track of my gaming picks and all of our Foolish analysis of gaming stocks with My Watchlist and My Fool Daily emails.
- Click here to add MGM Resorts to My Watchlist.
- Click here to add Melco Crown to My Watchlist.
- Click here to add Las Vegas Sands to My Watchlist.
- Click here to add Wynn Resorts to My Watchlist.
