(Bloomberg) -- The summer of revenge spending is over, and a number investors have decided that once high-flying casino stocks just aren’t worth the gamble.
Casinos were ripping through the first half of the year as relentless consumer spending sent demand for everything from concerts to blockbuster films soaring. On July 18, the S&P Composite 1500 Casinos & Gaming Index set a 52-week high and was up over 28% for the year compared with a 19% gain in the S&P 500 Index.
Through September, however, the casinos index has crept closer to a bear market with an 18% plunge since peaking, while the broader S&P lost just 6%. MGM Resorts International has led declines, sinking 26% since the casino gauge peaked. Golden Entertainment Inc. isn’t far behind with a 24% loss in that time. Of the 10 stocks in the index, only slot machine maker Light & Wonder Inc. was in the green over that period, mustering a 0.5% advance.
So what’s driving the selloff? Some strategists are pointing to fears of weakening consumer spending and an economic downturn as the Federal Reserve keeps interest rates higher for longer. As Americans cut their expenses and exhaust their excess savings, pricey vacations at ritzy casinos have become less of a priority.
Read More: Consumer Stocks’ Struggles Are Denting Soft Landing Hopes
The third-quarter earnings season will offer crucial insight into the financial health of an increasingly price-sensitive consumer who’s contending with higher prices at the gas pump and federal student-loan repayments that resume this month, according to Macquarie analyst Chad Beynon. Both Las Vegas Sands Corp. — which generates most of its revenue from Macau and Singapore — and Monarch Casino & Resort Inc. are expected to announce quarterly results on Oct. 19.
“There’s going to be weakness for that low-end customer with credit card and student loan payments,” Beynon said, also noting that the third quarter is packed with revenue-driving events such as China’s Golden Week holiday and the Formula One race in Las Vegas. “Maybe that is the catalyst for people to learn that the third quarter is OK and the sky is not falling,” he says.
A Lucky Opportunity
The group’s 14-day relative strength index sagged below 30, which some market technicians view as a sign of oversold conditions. The casinos gauge is still up 5% this year, though it trails the S&P 500’s 11% advance over the same time.
There are signs within corporate America’s financial updates that consumers are better off than previously thought. Carnival Corp. set the tone for the leisure space Friday when it reported strong demand and record revenues in the third quarter, and earlier Nike Inc. forecast a slight increase in sales for the current quarter.
While it’s true consumers are coping with higher prices, the gaming industry has yet to come across any red flags. Gaming revenues continue to rise in Nevada, and Bloomberg Intelligence forecasts Macau’s gross gaming revenue to recover to 61% of pre-Covid levels in 2023. Wells Fargo Investment Institute’s Sameer Samana says that people will keep ponying up for experiences as long as their wages can support it.
“Anybody who really wants a job can get one,” Samana said, “and if you can use that job to fund your vacation or pay the interest on your credit card, I think people are still out there spending.”
Beyond the Casino Floor
Concerns of consumer weakness aren’t confined to the US, with Macau-centric names like Las Vegas Sands and Wynn Resorts Ltd. seeing declines over the past few months. China’s property crisis is stoking worries that an economic slowdown could impact customer visitation, and casino companies exposed to the region are trading at a discount to historical averages, according to Stifel analyst Steve Wieczynski.
“We aren’t sitting here and trying to say a weaker China macro backdrop won’t impact Macau visitation/spend levels, but we would argue the market has already priced in a greater impact versus what will be observed,” Wieczynski wrote in a note to clients.
Read more: Macau Casinos Revenue Growth Slows Before Golden Week Holiday
It also doesn’t help that two major industry players — MGM and Caesars Entertainment Inc. — are dealing with fallout from a pair of cyberattacks that were disclosed in September. The latter admitted to paying millions of dollars to hackers who broke into the company’s systems, while a data breach on the former interrupted services ranging from guest check-ins to slot machine cash-outs.
And separately, tens of thousands of Las Vegas-based hospitality workers voted to authorize a strike if negotiations with the city’s biggest resorts fail to materialize a new contract, potentially crippling operations during a busy event season.
But there is an expectation that costs related to the cyberattacks will be minimal, and that workers on the Vegas strip will resolve the labor dispute sooner rather than later. Some have the view that the negative sentiment and a recent selloff have gone too far in punishing casino stocks ahead of an uncertain earnings season.
“There’s been these company-specific issues against this broader macro concern, and some certainly scream more undersold than others,” said Daniel Politzer, a gaming and leisure analyst at Wells Fargo. “Broadly, we think that there are opportunities to be had.”
©2023 Bloomberg L.P.