Caesars Low-Quality Stock with Bear Market Rally Potential

Posted on: May 13, 2022, 04:00h. 

Last updated on: May 13, 2022, 11:08h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Caesars Entertainment (NASDAQ:CZR) are off 46.72% year-to-date, and the company is one of the most debt-riddled in the gaming industry. So it fits the bill as a low-quality stock in the eyes of some market observers.

Caesars stock
Caesars Palace on the Las Vegas Strip, seen above. Bank of America says the stock has rally potential. (Image: Barron’s)

That dubious status could actually work in the casino operator’s favor should a summer rally come to pass on Wall Street after more than four months of relentless selling. Caesars appears on a list of bear market rally candidates constructed by Bank of America.

The bank screened for S&P 500 member firms with quality grades of “B” or lower that also qualify as high beta names.

During bear-market rallies, low quality, high risk stocks that are most beaten down typically outperform,” writes Bank of America strategist Savita Subramanian.

Beta gauges a security’s volatility relative to the broader market. In simple terms, a high beta stock like Caesars is likely to overshoot market moves in either direction, and when its momentum wanes, selling pressure can be severe.

Caesars in Interesting Company

Caesars is one of 28 stocks on the aforementioned Bank of America list, and is the only gaming name in the group. Other companies on the list include Amazon (NASDAQ:AMZN), Facebook parent Meta Platforms (NASDAQ:FB), and COVID-19 vaccine maker Moderna (NASDAQ:MRNA).

Yesterday, the Harrah’s operator closed at $49.83, extending its one-month decline to 25.65% while marking the stock’s first close below $50 since November 2020. That despite US casinos setting a gross gaming revenue (GGR) record in the first quarter, with many operators signaling that momentum is carrying over into the current quarter.

Still, analysts remain bullish on Caesars, saying the stock’s selloff is too severe, and the name is now underappreciated by investors.

“CZR continues to frame one of the largest CY22E and CY23E deleveraging stories, in our view, with the most significant components scheduled for the near-term. As CZR’s tapped the breaks on digital spend and brick-and-mortar operations grows sequentially, free cash flow (FCF) harvesting is underway,” said B. Riley analyst David Bain in a note out earlier this month.

Caesars Not Short of Catalysts

While 2022 could be the year “sell in May and go away” proves to be fruitful investing wisdom, some market observers are wagering on a summertime rally.

Given stocks’ proclivity for summer lethargy coupled with a downbeat start to 2022, that might be asking a lot. Specific to Caesars, however, the operators has catalysts, including a potential near-term announcement on the sale of one of its Las Vegas venues. Speculation is intensifying Flamingo is the property that will be sold, and it could command a $1 billion price tag.

“Bottom line is that we continue to have the utmost confidence in management’s ability to navigate this tricky environment and emerge a leaner/more efficient company which should directly enhance shareholder value over time,” said Stifel analyst Steven Wieczynski in a note. “We continue to see a path back to a triple-digit CZR share price, an outcome supported by management’s ability to generate $8-$10 or more of FCF per share over time.”