MorningWord 3/22/16: Offsides, Defense

by Dan March 22, 2016 10:28 am • Commentary

First things first, days like today have become all too frequent in the last 15 years, where we wake up to news that shakes our humanity. While Brussels, San Bernardino, and Paris capture the news cycle for weeks, we’d be remiss not to mention what seems like and endless string of terror suicide bombings in the non-white world, like the one in Istanbul a few days ago (that barely made the front pages) and the endless suicide bombings in Afghanistan and Iraq.

There are some who will use events like today for political gain, conflating xenophobia and fear as toughness. But let’s resist this unhealthy urge and remember that attacks like the one that occurred today have also taken place in the Arab world, perpetrated by the same enemy, like the attack in Lebanon days after Paris that killed dozens, the one in Libya in January, a month after San Bernardino killing 60, Ankara, Turkey in February where 28 were killed, Mali, etc, etc.  My main point is that this is a global epidemic that cares not for borders, and like it or not, we are all in this together regardless of religion, race or nationality.


I rarely offer opinions like the one above in this space, but on days like today where the Wall Street game seems unimportant, let me start with a salty take on a brokerage upgrade of Wynn Resorts by Morgan Stanley, where gaming analyst Thomas Allen raised his rating from Hold to Buy and his price target from $77 to $120.

WYNN’s nearly 100% rally off of its multi year lows (made in early January) caught many off-guard. And most analysts move in packs, for fear of being too far from consensus.  Thomas downgraded the stock from a Buy to a Hold in February 2015 when the stock was $146, the stock declined to $50 in January. Now he upgrades 13 months later at $93.  That’s lower than the downgrade, so it’s not terrible trading but this is after the stock has had a massive run from the lows and could already be a trap for new longs. So what were these guys doing when the stock bounced off its early October low and seemed to be making a double bottom in the $50s in Jan and Feb?

WYNN 1 yr chart from Bloomberg
WYNN 1 yr chart from Bloomberg

You might say “okay smarty pants, where the hell were you??” Well! On Feb 11th, prior to their Q4 results that day I had the following to say:

In 2009 when the stock traded as low as $16, WYNN saw its earnings decline 90% year over year, from $2.51 to 26 cents, despite sales actually increasing 2% from 2008 to 2009 to $3.05 billion. Since 2009 WYNN saw a dramatic ramp in earnings to $7.58 a share in 2014, but now has an expected 59% decrease in 2015 (to be reported tonight). The stock trades as if investors think that consensus eps estimates calling for a 2% increase in 2016 is too aggressive on a 13% yoy sales increase.  If things were to stabilize in Macau, and high rollers were to come back, corruption crackdown to slow, adverse effects of smoking bans to abate, then WYNN will be one of the first U.S. multinationals doing biz in China to absolutely rip. But those are some big ifs. And no one is going to ring the bell at the bottom, so I suspect the turn comes when results merely get less bad.  The company’s balance sheet is still ok, but a sustained downturn will put their leverage ratio in focus as the company is bringing MORE capacity online in Macau in 2016.

With 20% short interest, and the stock being unloved by Wall Street Analysts (9 Buys, and 13 Holds) the stock could act like a coiled spring on the slightest bit of good news.

The point here is NOT to take a victory lap as I did not buy the stock in any way shape or form, but to simply make the case why I’d much rather be early, then be chasing a stock like WYNN after a 100% bounce like a lemming. There is that old market adage that early is often wrong, but the fact of the matter is when it comes to investing, I’d rather be kicking the tires prior to a move than after.



In case you missed it last night, Mike Khouw, CC and I hosted a webinar for The Ticker District on options positioning around events. I think the webinar is good no matter your experience with options trading as we cover some easily understandable overlays and stock alternative strategies as well as getting into the weeds a bit with event move probabilities. So hopefully a little something for everyone in there. You can watch the hour long episode below:

And here is the PDF of the presentation for closer inspection:

Webinar6 – Options