Ignore the Macau numbers — gambling on casino stocks is a bad idea: Traders

Casino stocks have seen a nice comeback of late, but some traders are cautious of betting on the gaming rally.

Macau's September gross gaming numbers rose 7.4 percent from last year, a number that surpassed the 4 percent growth estimate and sent casino stocks soaring on Monday. But Chad Morganlander, portfolio manager at Stifel Nicolaus, sees the excitement over Macau's numbers as short-lived.

"Although the global backdrop for the overall economy is decelerating, these stocks have moved higher based off of the fact that they believe that China has stabilized," he said Monday on CNBC's "Trading Nation." "We don't believe that to be the case."

"Going into 2017, we believe there will be GDP growth in China of roughly 2 percent," added Morganlander. "That will not bode well for the Macau industry as a whole."

Macau's gambling industry boomed this year as some of the world's biggest gaming companies made some of their biggest long-term investments in the region. In August, Wynn Resorts opened the lavish Wynn Palace, which cost $4.1 billion to build, to complement its Wynn Macau mainstay, while Las Vegas Sands' Parisian Macao hotel and casino opened its doors in mid-September. The companies' focus on Macau helped turn the region's gaming revenues around after more than two straight years of decline.

But "Crossing Wall Street" blog editor Eddy Elfenbein thinks that casino stocks could see their rally stopped sooner than investors may think.

"Macau had 26 straight months of declining revenue," said Elfenbein. "They finally turned the corner, so that looks good for them, but these stocks, the run they've had since the summer, I think they're just too rich right here."

Thanks to their big projects in Macau and solid earnings, Wynn is up more than 43 percent year to date while Las Vegas Sands has also soared over 34 percent this year.

"We are encouraged by the second consecutive positive monthly [comparison]," Stifel gaming analyst Steven Wieczynski wrote in a Monday research note. "That said, we continue to expect trends to remain choppy in the near term, particularly on the mass side of the business, as the market works to fully absorb recent and forthcoming supply additions."


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more