Caesars, MGM Could Put the Hurt on Short Sellers if Bulls Seize Control of Market

Posted on: April 6, 2020, 03:51h. 

Last updated on: April 6, 2020, 04:47h.

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

Broadly speaking, shorting stocks is a winning strategy to this point in 2020, and nowhere is that more true than the travel and leisure industry, a group beset by savage declines at the hands of the coronavirus pandemic.

If markets rally, Caesars and MGM short sellers could feel some pain. (Image: MarketWatch)

With COVID-19 punishing the gaming industry from the East Coast to Las Vegas to Macau, forcing temporary closures and, in some cases, tens of thousands of lost jobs, bearish traders eagerly shorted shares of casino operators, including Caesars Entertainment (NASDAQ:CZR) and MGM Resorts International (NYSE:MGM).

Monday’s seven percent gain by the S&P 500 could prompt some short sellers to consider exiting bets on gaming names, stoking further upside because, when a short is covered, the trader must buy shares to close the position. If markets continue rallying, forcing bearish traders to cover – a phenomenon known as a short squeeze – Caesars and MGM could be two of the biggest beneficiaries.

With the market rallying today, we may see short sellers buying shares in the following stocks and pushing stock prices even higher than if only long buying was taking place in the name,” said S3 Partners Managing Director Ihor Dusaniwsky in a note obtained by Casino.org today. “Sectors which were hit hard in the market downturn are represented in the top 25, and we see cruise lines and casinos (MGM & CZR) as some of the top short buying targets during a rally.”

Entering Monday, the Bellagio operator was the fourth on S3’s list, as ranked by a percentage of profits for short sellers, while Caesars was number 14.

Not Profits Until They Take ‘Em

One of the more famous Wall Street adages is “profits aren’t profits until you take them.” In the case of the bearish bets on MGM and Caesars, traders were sitting on substantial unrealized gains coming into Monday.

The average short interest in MGM since March was nearly $860 million, while total net profit for short sellers was $886.6 million, according to S3 data. For Caesars, those figures are $677.6 million and $543.4 million, respectively.

“If these short sellers see their sizable unrealized profits begin to get eaten away by a rebounding stock market, there is a good chance that they will start buying back shares to lock in their remaining profits,” said Dusaniwsky. “This would provide an additional boost to the stock’s price, as they trade alongside long buyers on the bid side of the market.”

Shorting those names has been a winning bet this year, as both are being pounded due to temporary closures in Nevada, as well as at all of their regional properties.

Reasons for Shorts to Worry

Caesars and MGM are down 48.46 percent and 61.20 percent, respectively, year-to-date, and while it could take awhile for the stocks to reclaim prior highs, they got off to a good start today. On heavy volume, the Mandalay Bay operator surged 22 percent, while Caesars jumped 11.62 percent.

With gaming equities battered this year, any bit of good news could spark substantial near-term upside in the names, chastening bearish traders in the process.

“With the domestic stock markets down significantly in 2020, the vast majority of short trades are ‘in the money’, and diligent traders are preparing exit strategies for their profitable short positions when the markets begin to trend upwards,” said Dusaniwsky.