The online casino market has experienced rapid growth this year as more states legalize so-called iGaming to supplement faltering tax revenues.
Cabot Profit Booster 140
The long-anticipated market swoon kicked off last Thursday denting many stocks, including a couple we own. That being said, of our six positions I would say five are in good/great shape, and only our most recent buy, HZNP, is in “bad” shape (it’s not that bad, and HZNP received a big upgrade this morning).
In an attempt to continue to keep the portfolio as diversified as possible, this week we are adding a stock in the gaming/iGaming sector. Here is that stock and our trade:
The Stock – Penn National Gaming (PENN)
The online casino market has experienced rapid growth this year as more states legalize so-called iGaming to supplement faltering tax revenues. Penn National Gaming now has more gambling licenses than any casino operator in the nation (42 properties in total) and is rapidly becoming one of the largest online gaming platforms. Penn is also poised to become a major player in digital sports betting, another huge and growing area, thanks to its 36% stake in sports blog provider Barstool Sports (purchased earlier this year).
As of early August, all but two of Penn’s properties have resumed operations, and while capacity is limited to 50% of normal, the firm reports those customers that are showing up have boosted spending by a whopping 45%. While Q2’s top line (-77%) was impacted by COVID-related safety protocols, it was much stronger than analysts expected, beating the consensus estimate by $63 million. Penn reported encouraging growth trends in July and early August, and the firm has made significant progress in developing the Barstool Sportsbook mobile app (set to be launched in Pennsylvania later this month, with more states to follow in the next two quarters).
Its improved liquidity, coupled with an aggressive reduction in operating expenses, should provide well over 12 months of operating cash in the (unlikely) event of another shutdown and zero-revenue environment, but big investors aren’t looking at the worst-case scenario—instead, they’re focused on the fact that Penn has the potential to capture a good chunk of the iGaming and online sports betting sectors in the quarters to come, two themes we think have big potential.
Technical Analysis
PENN was crushed in March, recovered in full by June, and then chopped sideways for nearly two months. When we last wrote it up, the firm was just about to report results, and investors were pleased—PENN broke out in early August and enjoyed a nice-looking move on elevated volume. It’s since begun to catch its breath, but there’s been no abnormal action, with volume drying up and the stock hovering near its 25-day line. Further weakness is possible, but we still think the next major move is up. Stop — 44
The Covered Call Trade
Buy Penn National Gaming (PENN) Stock at 56, Sell to Open October 60 Strike Calls (exp.10/16/2020) for $4, or a Net Price of 52 or less
Static Return: $400 per covered call (7.69%)
Breakeven: 52
Covered Call Return (if assigned): $800 per covered call (15.38%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 52 or less. (In this case 56 minus 4 = 52. Or another example is you could pay 56.5 for the stock and sell the call for 4.50, which also equals 52)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
