The Rise and Fall of Melco Crown Entertainment

Stock Market Video

The Rise (and Fall) of Melco Crown Entertainment

This Week’s Fortune Cookie

In Case You Missed It

One of my favorite stock stories of the last few years was Melco Crown Entertainment (MPEL), a Hong Kong-based owner and operator of gambling casinos in Macau. Macau is a former Portuguese colony that’s just 40 miles west across the Zhujiang River estuary from Hong Kong and, more importantly, the only place in China where gambling is legal.

A quick look at the chart for MPEL will summarize why I liked it so much. From August 2012 through January 2014, the stock soared from around 10 to 45, with only a handful of relatively mild corrections along the way. It’s the kind of chart growth investors live for.

The story behind this lovely chart was persuasive and easy to tell. Melco Crown was one of the very few companies that had a license to build casinos in Macau (Wynn Casinos, MGM Grand and Sands are among the others). China is developing some seriously rich people, and rich Chinese people traditionally enjoy high-stakes gambling … very high-stakes gambling. (In 2011, these high rollers contributed nearly three-quarters of the revenue generated by Macau casinos.)

So, limited supply of gambling outlets, increasing supply of big gamblers. Good story.

But, like the scorpion, the sting is in the tail. Here’s the chart for MPEL from January 2014 to the present.

As it turns out, there were things going on behind the scenes that outsiders didn’t really know about. Most important was the role of middlemen called junket operators, businesses that picked up high rollers in Chinese cities and delivered them to Macau casinos. Since gamblers couldn’t take more than 20,000 Chinese yuan (about $3,300) with them, they needed a source of cash to gamble with. The junket operators supplied the cash and took a little slice of each bet the whale made. Since the big boys’ bets had to total at least $1 million per visit to get the best luxury treatment, that little slice could be huge. The system was rocked to its roots in April 2014 when one of the men who owned part of a junket promotion company looked at his bag of cash and, succumbing to temptation, decided to just leave the building with it and vanish into the night. He hasn’t been seen since.

The bag contained $1.3 billion (with a “b”).

At that point, the wheels came off the whole junket system.

Backers were less willing to put up the money and demanded a higher cut of the rolling chip count. Combined with the chilling effect of the anti-corruption campaign that’s now going on in China, analysts expect Macau casinos’ to register a 25% drop in revenue this month. (When you gamble large, highly visible amounts of money, people may become curious about where the money came from.)

And that’s how a simple, “can’t lose” story found a way to lose. It’s just another example of what Thomas Phelps, the man who wrote 100 to 1 in the Stock Market, called “the unforeseeable and the incalculable.” Phelps saw this as a generally positive factor, and one that would bring great results to the investor who could identify companies with great long-term prospects and then hold on for as long as it took. But my experience, and that of most growth investors, is that holding on for a long time can also give the market plenty of opportunities to draw a bead on you. If you want to make money in the stock market, buying well and having strict rules about when to sell are better rules than “buy and hold.”

If the story needs a moral, it’s simple: If growth investing is like a game of “rock, paper, scissors,” but is played with story, numbers (fundamentals) and chart, it’s always a good idea to bet on the chart.

In this week’s stock market video, Mike Cintolo discusses the still-bullish overall market, noting that the indexes look great and very few stocks have suffered abnormal selling. However, most growth stocks have been chopping around since early November-that could be a good thing (lots of tighter launching pads to potentially buy from), but Mike is looking for clear upside follow-through before putting more money to work. Click below to watch the video.

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here. 

Tim’s Comment: Just as wars are notorious for not going according to plan, the stock market is famous for its ability to take the money of even the best-prepared investors from time to time. Perfection, however, is not the goal; the goal is to learn from your failures so you can win in the long run.

Paul’s Comment: As a man who knew a great deal about planning things (like D-Day and the re-conquest of Europe in WWII), Ike is a good man to pay attention to. In the stock market, having an idea about what might happen next isn’t half as useful as knowing exactly what you will do depending on what actually happens. Or, as the loggers in my native Oregon used to say: “If you don’t know which way the tree is going to fall, be ready to jump!”

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 12/1/14 – Selfie Countries 

In this issue, Cabot Stock of the Month’s Chief Analyst, Tim Lutts, talks about the proliferation of nations and the reduction in the number of languages in the world. He also recommends Cabot’s 10 Favorite Low-Priced Stocks for 2015, which will be released on December 17. Find more information here.

Cabot Wealth Advisory 12/2/14 – Three Top Business Development Companies 

Chloe Lutts, Chief Analyst of Cabot Dividend Investor, writes about companies that invest in private or small businesses, providing funding and consulting to get them running better. Stocks discussed: Hercules Technology Growth Capital (HTGC), TCP Capital (TCPC) and Main Street Capital (MAIN).

Cabot Wealth Advisory 12/4/14 – The Market Teaches Bad Behavior 

In this issue, Cabot Market Letter’s Mike Cintolo discusses how a choppy market can teach you bad lessons about buying and selling. Mike also looks at how stock losses can compound on the way down. Stock discussed: Concho Resources (CXO).

Sincerely,

Paul Goodwin 
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

Comments