Biden Capital Gains Tax Plan Could Crimp Caesars, Pinch Penn National Investors

Posted on: April 27, 2021, 11:03h. 

Last updated on: April 27, 2021, 11:30h.

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

President Biden recently proposed the largest US tax increase in three decades. If that plan becomes law, it could affect an array of stocks, including Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN).

Biden capital gains
President Biden discussing his infrastructure plan. Caesars and Penn are among the stocks that could be vulnerable if taxes rise. (Image: Jonathan Ernst/Reuters)

The Made in America Tax Plan includes a near doubling of the current capital gains rate for the wealthiest Americans. The White House wants to move that rate to 39.6 percent from 20 percent. If it becomes clear that’s going to be the new standard, investors holding stocks with substantial gains over longer holding periods could be compelled to sell those shares before the Biden proposal goes into effect.

Past capital gains tax hikes have been associated with declines in equity prices and in household equity allocations,” according to Goldman Sachs. “Also, high-momentum ‘winners’ that had delivered the largest gains to investors ahead of the rate hike have usually lagged.”

“High-momentum winners” is a description that applies to Caesars and Penn. Shares of the gaming operators are up 444.22 percent and 540.28 percent, respectively, over the past year as markets priced in recovery from the coronavirus pandemic and the online sports betting boom, among other factors.

Why Caesars, Penn Could Be Vulnerable

As noted above, Caesars and Penn are sporting impressive gains over the past year. Over that period, the pair of recent additions to the S&P 500 are two of the best-performing US stocks, gaming or otherwise.

The Harrah’s and Ameristar operators are two of the top five names on Goldman’s list of biggest one-year capital gains and are the only gaming equities in the group. The other three are apparel retailers Gap and L Brands, and electric vehicle giant Tesla.

Neither Caesars nor Penn appears in the groupings for the largest three- and five-year capital gains. But the Flamingo operator is in the top five for most substantial 10-year capital gains, according to Goldman Sachs.

“Tech and Consumer Discretionary sectors have been the largest sources of capital gains within the US equity market during the last 3, 5, and 10 years,” says the bank.

Gaming equities, including Caesars and Penn, reside in the consumer cyclical sector.

Good News, Maybe Some Bad, Too

For investors currently holding either Caesars or Penn, the good news is that the Biden capital gains tax plan pertains to a scant percentage of investors and US households. Roughly three-quarters of US investors that own equities do so through retirement plans, such as 401(k)’s and individual retirement accounts (IRAs). Those vehicles are exempt from the White House’s tax hike plan.

However, the two gaming names aren’t entirely out of the woods. In particular, Penn is recently struggling, residing 34.64 percent below its 52-week high.

Additionally, the combination of big 12-month gains that could compel investors to make profits regardless of tax policy, and fierce competition in the iGaming and online sports betting segments, could prompt some market participants to reduce exposure to Caesars and/or Penn.