The consumer discretionary group is 2015’s best-performing sector, but investors would not know it by looking at the Market Vectors Gaming ETF (NYSEArca: BJK). BJK, the lone dedicated casino and gaming exchange traded fund, is off nearly 18% this year.
Slumping revenue from Macau, the Chinese territory that is the world’s largest gambling hub, is a big reason behind BJK’s 2015 woes. Moreover, after Macau casino shares plunged an average 47% this year, short interest in the stocks have piled on, exposing the down trade to a short-term squeeze on any positive news. A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of a sudden share appreciation – short sellers are essentially being squeezed out of their short positions at a loss. Consequently, the additional buying momentum from short sellers covering their options contracts help bolster share prices even further.
However, Macau’s casinos are still suffering from a dearth of high-rollers, who have shied away from making bets as the Chinese economy weakens, the markets experienced a correction and the government cracks down on corruption. Heading into 2016, some industry analysts see opportunity with Macau stocks.
“We believe growth over the period will be driven by a $16 billion increase in Cotai GGR, offset by a $8 billion decrease at Peninsula & Taipa casinos. With Macau casino stocks just coming off of multi-year lows and uncertainty regarding the gaming market’s prospects running high, we think that now is the time to build positions in casino companies levered to Macau. We’re believers in the long-term success of Macau and other jurisdictions that cater to Chinese gamblers; but with multiple new mega-resorts opening in Cotai and demand weak, risks to near-term earnings remain,” according to a Gabelli note posted by Teresa Rivas of Barron’s.
Macau, the only Chinese territory where gambling is legal, is the world’s largest gambling hub. The city is trying to rebuild its market with shops, restaurants, entertainment shows and other non-gaming attractions to bring in more middle-class tourism. For instance, Galaxy Macau is planning a Broadway.
Junket operators, who account for two-thirds of betting in Macau, lend to Chinese players who are limited on how much money they can bring over from the mainland, and the operators collect gambling debt. [Gambling ETF Cools Off]
Market Vectors Gaming ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.