Frank Curzio's WALL STREET UNPLUGGED Podcast

Time To Buy These Two Hated Growth Stocks?

Wynn

In 2009, Chinese gaming companies started to see explosive growth. And many investors who jumped on this trend made a lot of money.

Over the next five years, companies like Las Vegas Sands (LVS) and Wynn Resorts (WYNN) outperformed the S&P 500 by an average of 600%.

These are two American companies (along with MGM Resorts) with special licenses to own and operate casinos in Macau, China.

But after years of steady growth, Macau’s gaming revenue started to fall.

LVS and WYNN felt the pinch because they receive a bulk of their revenue from Macau.

In short, it was just a matter of time before the weakness in Macau filtered down to the bottom lines of these two growth companies.

That’s why, in June 2014, I warned investors to sell Chinese gaming stocks.

Since my call, LVS and WYNN are down an average of 28%.

To put this in perspective, the S&P 500 is up 7% in the same timeframe.

LVS and WYNN are now hated stocks. Nobody wants to own them.

However, they are cheap … they pay huge dividends … and they have adapted to the weakness in Macau by cutting costs.

More important, they have several catalysts that could push them sharply higher over the next 12 months.

That’s why both names are looking like a buy today.

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Macau is one of the greatest growth stories in the world. It’s the only place in China where gambling is legal.

The small island generates six times more gaming revenue than the Las Vegas strip.

However, Macau has been in a severe downturn. This once high-growth market has seen gaming revenues decline for 10-straight months.

Most of this decline was self-inflicted.

It started with the Chinese government cracking down on illegal activities in Macau.

They arrested powerful businessmen, placed cameras in every casino, banned smoking on casino floors and started tracking purchases on the island.

This hunt for money-launderers has led to a huge decline in VIP gamblers.

In other words, the guests who spend the most money in high-profile casinos — like the ones owned by LVS and WYNN — have gone away.

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The good news is … most of this risk seems priced into these stocks.

For example, casino revenue plunged by 39% in March (from last year). Yet, LVS and WYNN — which have been drastically cutting costs over the past year — moved higher on this news (which was announced on April 1).

Plus, these companies pay a huge dividend (more than 4% yields) — which are covered by earnings and cash flow.

These safe yields also provide a floor on these stocks as investors may look to rotate out of expensive dividend-paying names like McDonald’s (MCD)Clorox (CLX) and Procter & Gamble (PG) — and into cheaper ones like LVS and WYNN.

(Here are more reasons why it might be time to sell MCD.)

Just to be clear, I am not recommending that you take a second look at LVS and WYNN simply because of valuation.

Sure, these companies are trading at a discount to the market following their huge sell-offs.

However, as I mentioned earlier, LVS and WYNN also have several significant growth catalysts that could push their stocks sharply higher.

Macau Plans to Win Back the Gamers 

LVS is adding a St. Regis hotel tower (400 rooms and 300 apartments) to its Sands Cotai Central hotel in Macau.

They are also building a new casino called the Parisian Macao (pictured below), which will add another 3,000 rooms. Both projects should open within 12 to 18 months.

WYNN is planning on opening the Wynn Palace (pictured below) in nine months.

This new casino will be the company’s second luxury resort in Macau. It will include 1,700 rooms, 1,000 slot machines and 500 gaming tables.

Studies show that most people traveling to Macau (or even Las Vegas) visit the newest casinos. Those tend to offer the best attractions, the most-updated facilities, the nicest restaurants and the most glamour.

Remember, Macau is the only place in China where gambling is legal. And I’m sure LVS and WYNN will see huge sales out of these new casinos once they open.

A More-Accessible Macau

Macau also has big infrastructure projects in the works that are likely to drive new traffic into Macau. This includes the Hong Kong Bridge and Taipa Ferry Terminal.

Although you can fly into Macau, most people usually travel to Hong Kong and then take a ferry over to the island (something I did on my visit to Macau in 2010).

However, the new 18-mile-long Hong Kong Bridge will make it much easier to travel to Macau by car or shuttle bus.

Macau is also building a massive transit system called the Macau Light Rail Transit. It will provide easy access to places throughout the city and help travelers avoid the massive traffic during rush hour. Think of it like the train system in New York City or Chicago.

Once built, the Macau Light Rail Transit will take passengers to 21 locations. This includes several casinos in Macau (including the new casinos mentioned above), the neighboring island of Taipa (where the Macau airport is located), and the Ferry Terminal (to go back to Hong Kong).

These infrastructure projects are still a few years away from completion. Plus, the new hotels being built by LVS and WYNN are still roughly nine to 18 months away from opening.

However, we can get paid to wait for these catalysts to develop.

Remember, LVS pays a huge 4.6% dividend. WYNN offers a nice 4.5% dividend. These payouts are much higher than the 1.6% yield the average S&P 500 company offers.

In my opinion, these dividend-payers offer a much-better option than buying Treasuries or keeping your money in a savings account that earns less than 0.2% in interest.

For growth and income investors, LVS and WYNN could be great stocks to buy. These companies trade at a discount and pay higher dividends than the market. This should provide a floor under these stocks, or limit the risk in these names.

As for the upside, LVS and WYNN could easily pop 30%-plus from these depressed levels as they open their new casinos.

Plus, they are likely to see a huge increase in traffic once these infrastructure projects are completed.

Take a look at these stocks, and see if you agree with me that it might be time to take a gamble on them again.

Good Investing,
Frank Curzio