Penn National stock took a sudden 25% dive over the last month. If you're thinking of buying this dip, you might want to think again.
Dave Portnoy, the founder of Barstool Sports, says the drop is thanks to a leaked video of him and that investors eyeing the legal sports gambling industry should buy the dip. Portnoy got an enormous amount of Penn National Gaming Inc. (NASDAQ: PENN) shares when he sold 36% of the freakishly popular Barstool Sports operation to the company. He definitely wants the stock to go back up.
But I don't think anyone is selling this stock because of him.
It's more likely the selling is from folks taking profits after the stock has run up by 2,000% in the past year.
The shares were an absolute steal down at $5 last year when the pandemic hit.
At $100 a share, they are not exactly a bargain.
But that doesn't mean the stock isn't worth owning.
Here's the full breakdown...
Why Penn National Stock Is So Exciting
Penn National owns some great assets. Penn has 41 gaming and racing properties in 19 states. It is a fast mover in sports betting and takes bets in seven states. All told, it has 1,300 table games and 8,800 hotel rooms. Its loyalty program has more than 20 million members.
By all accounts, Penn National has done a masterful job of navigating the pandemic. Obviously, revenue and earnings declined in 2020, but management at Penn National has done a pretty good job of navigating probably the strongest years in the company's history.
But what makes people even more excited about the stock is the company's ownership stake in Barstool Sports and its transition to mobile sports betting apps.
It is leveraging Portnoy's army of young gamblers by offering a Barstool Sports branded mobile betting operation. Not only is it keeping head-to-head with DraftKings Inc. (NASDAQ: DKNG), but it has a baked-in audience from Barstool who can bet alongside personalities there. Plus, it opened physical Barstool-branded sportsbooks in Pennsylvania and Michigan. These will complement its already existing mobile betting app in Colorado, Indiana, Iowa, Michigan, Mississippi, Pennsylvania, and West Virginia.
You can expect even more growth as more states legalize sports gambling.
So why not buy Penn National stock today?
Why Penn National Earnings Could Nuke the Stock
The end of the pandemic will be fantastic news for Penn National. The relationship with Portnoy and Barstool should add value over time.
But the stock is probably not a buy at this high price.
Penn is going to report first-quarter earnings on May 6. Analysts are looking for $0.23 a share for Penn National.
The first quarter of the year includes the Super Bowl and March Madness, the biggest sports gambling events of the year. If it misses or even fails to beat these estimates, all the air will leave the room quickly.
The stock is priced for perfection at 40 times 2021 earnings estimates. And anything less than perfection in its earnings report will be punished by the momentum traders who piled into the stock as it was rising.
In the last 90 days, seven of the 14 analysts that follow the stock lowered their estimates. Just two raised their best guess about earnings.
More cuts than raises is often an indication of a negative surprise for the quarter.
The risk-reward here is badly skewed to the downside. If it hits the estimates or exceeds them, that's what is expected by the market right now.
The stock might go up a bit if that happens.
If it falls short of the consensus estimate, this stock is going to get slaughtered.
Penn National is a great sports betting story. The problem is that there are a lot of people fighting for the online sports betting dollar. Penn will get its share, and Portnoy's army will probably help.
Its market share is not going to be enough to justify the premium valuation.
Yes, Penn National is a reopening story. The problem is that the opening has been more than priced in at the current valuation multiples.
The biggest argument against buying shares of Penn National is that Penn National is a momentum stock right now, and the momentum appears to be fading.
In mid-March, the 14-day relative strength reading turned down and has moved down steadily. There are no signs of a reversal, and the stock has not yet reached anything near oversold levels.
On March 18, the price of PENN shares moved below the 20-day moving average, and six days later, it was below the 50-day moving average as well.
Last week, the 20-day crossed below the 50-day, confirming the short-term downtrend in the stock.
Continued declines are likely to cause more aggressive selling as stop-loss orders are triggered.
A lot of positive things would have to happen for Penn National shares to reverse course right now, while even one negative event can send the shares into freefall.
Penn National is an outstanding company. The stock is just priced too high right now.
But there are stocks out there with real potential...
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