Casino stocks could prove some of the best bets among consumer names, Bank of America says

Published Fri, Jun 3 20221:27 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Investors may be able to hide out from an uncertain economic outlook in casino stocks, according to Bank of America. Concerns about a slowdown in economic growth and a shift in spending to services from goods has created some major downside moves in consumer discretionary stocks in recent months. Retail stocks, for example, reported mixed first-quarter results as even some of the biggest names like Walmart and Target struggled to manage their inventory. Apparel giant Nike is down 26% year to date. Casinos, on the other hand, is a simpler business in some ways than other consumer discretionary companies, Bank of America said, which could make them a safer bet. "Gaming has some key advantages vs. other discretionary sectors: 1) no inventory/gross margin risk, 2) no commodity/input cost risk, 3) no F/X risk, and 4) healthier balance sheets vs. pre-COVID," analyst Shaun Kelley wrote in a note to clients. Casino stocks were hot commodities in 2020 during the pandemic amid high hopes for a surge in interest in online sports betting, but enthusiasm has waned. DraftKings , for example, traded above $60 per share in early 2021 but closed near $14 on Thursday. Marketing spending on the sports betting side has been a big source of concern for investors and Wall Street analysts, but not all gaming companies are pure plays on mobile sports gambling. Casino companies have made cuts elsewhere that are helping to strengthen their bottom lines, Bank of America said. "Our average company has 27% fewer employees at the end of 2021 vs. 2019. So we think margin expansion is less about reduced promo, marketing or unsustainable cost leverage and more about pure headcount," Kelly wrote. That smaller headcount also means that the companies should be somewhat insulated in the event of a recession, Bank of America said. The firm modeled two different recession scenarios and found the companies to still be in good shape relative to 2019 margin levels. "The net is we estimate a ~10% EBITDA risk in a mid-case recession scenario and loss of ~200bps-400bps in property-level margins, but this is only about 20%-40% or less than half of the margin expansion gained during the pandemic," Kelly wrote. Bank of America's favorite stocks in this group include Boyd Gaming, Caesars Entertainment and Penn National Gaming. Of those, Boyd is the only one that has outperformed the market this year, declining about 8%. Here are Bank of America's price targets for its three favorites, and their potential gains if those goals are reached. Boyd Gaming : $80 per share, 33.5% upside Caesars Entertainment : $90 per share, 73.5% upside Penn National Gaming : $50 per share, 48.5% upside — CNBC's Michael Bloom contributed to this report .