Investment Thesis

Objective: Wealth-building of an always fully-invested portfolio via repeated near-term (weeks or months) capital gains from careful, diversified, odds-on issue selection and timely price opportunity capture.

Eldorado Resorts (NASDAQ:ERI) stock offers a substantially larger and more likely achievable price gain in the next three months, with less interim price drawdown exposure, than most of some 2,600 other stocks whose price prospects are now forecast by well-informed investment professionals.

Why Read This Report?

This is an analysis of how the prices of specific securities are likely to change in the next 3-4 months, based on the way major investment organizations (“institutional investors” or “big-$” funds) have perceived those prospects and made multi-million-dollar trade changes of holdings in their multi-billion-dollar portfolios. That rationale is explained further in my SA blog’s article “Why Read This Report?

What is ERI’s business?

“Eldorado Resorts, Inc. operates as a gaming and hospitality company in the United States. It owns and operates Eldorado Resort Casino Reno, a hotel, casino, and entertainment facility; Silver Legacy Resort Casino, a themed hotel and casino; Circus Circus Reno, a hotel-casino and entertainment complex; Eldorado Resort Casino Shreveport, a hotel and tri-level riverboat dockside casino; Mountaineer Casino, Racetrack & Resort, a hotel, casino, entertainment, and live thoroughbred horse racing facility; Presque Isle Downs & Casino, a casino and live thoroughbred horse racing facility; and Eldorado Gaming Scioto Downs, a modern racino. The company also operates Isle Casino Hotel-Black Hawk and Lady Luck Casino-Black Hawk land-based casinos; Isle Casino Racing Pompano Park, a casino and harness racing track; Isle Casino Bettendorf, a land-based single-level casino; Isle Casino Waterloo, a single-level land-based casino; Isle of Capri Casino Hotel Lake Charles, a gaming vessel; Isle of Capri Casino Lula, a two dockside casino; Lady Luck Casino Vicksburg and Isle of Capri Casino Kansas City dockside casinos; Isle of Capri Casino Boonville, a single-level dockside casino; Isle Casino Cape Girardeau, a dockside casino, and pavilion and entertainment center; Lady Luck Casino Caruthersville, a riverboat casino; and Lady Luck Casino Nemacolin, a casino property. In addition, it operates Tropicana Casino and Resort, Atlantic City, a casino and resort; Tropicana Evansville, a casino hotel and entertainment complex; Lumière Place Casino, Tropicana Laughlin Hotel and Casino, MontBleu Casino Resort & Spa, and Grand Victoria Casino; Trop Casino Greenville, a landside gaming facility; Belle of Baton Rouge Casino & Hotel, a dockside riverboat; and Racelinebet.com. As of December 31, 2018, it owned 28 gaming facilities with approximately 30,000 slot machines and video lottery terminals; 800 table games; and 12,600 hotel rooms. The company was founded in 1973 and is based in Reno, Nevada.” – Source: Yahoo Finance

Who are the competitors in the Gaming group?

They are described in Figure 1’s list of current Market-Maker [MM] price-range forecasts. But first, focus on the size of and interest in these competitors in the right-hand side of the table.

Figure 1

Sources: Author, Yahoo Finance, Seeking Alpha

Column [S] tells how big is the readership interest in each issue focused on gaming services in our 3,500+ MM price-range forecast population. [T] indicates how big the market ownership investment is, and [U] and [V] reveal the extent of knowledgeable investors – where our forecasts are coming from.

[S] and [T] have dramatic differences among the issues, usually with columnar parallels. Since institutions are the typical driving force of price changes, there can be significant coming price influences in [U] and [V]. BTW, over 100% holdings are often the product of institutions seeking to expand their holdings in volume trade orders to MMs, who in turn are unable to find willing sellers at then current prices.

But there are other institutions willing to lend shares for a fee, where recall at any time is part of the loan terms. Since the only way to “fill” the block trade order described just above is to “short-sell” borrowed shares to be delivered to the block trade buyer. Then Institutions as a group may wind up appearing to own more than 100% of the shares.

It also suggests there have been times when investor demand has been beyond normal supply and demand restraints. And the potential may exist for lenders to recall loans, forcing short-sellers to have to “cover” their loan delivery needs in the situation known as a “short squeeze”. Financially destructive for those being short.

But the MMs won’t go short unless they can buy insurance against the risk, and weave the cost of that “liquidity price” into the spread they demand of an eager stock-buying block-trade orderer. So the risk gets passed off to others via the derivatives securities markets.

The MMs are very aware of such situation possibilities, and they are reflected in the actions being taken day by day influencing their coming price forecasts seen on the left side of this Figure 1.

How does ERI’s Reward to Risk balance compare to competitors?

Figure 2

Source: Author

This map locates equity securities at the intersection of prospective price gains (green horizontal scale) and potential price drawdowns (red vertical scale) based on market-maker hedging behavior to protect their necessary endangerment of firm capital as they enable volume trades. These subjects are stocks of software vendors. Desirable conditions are down and to the right.

The “frontier” of best advantage runs from SPY at location [11] to ERI at [13] and on to BILI at [10]. Of most interest to us here is ERI, and possibly BILI. Figure 1 measures are limited to the size of likely up or down price changes for its subjects. Of additional interest is questions of how soon, how likely, and how well-forecast are these comparisons.

Those questions are addressed for several available similar investment alternatives using measures illustrated by ERI in the MMs’ recent price range forecasts, pictured as vertical lines in Figure 2.

Figure 2

Source: Author

Figure 2 shows how ERI’s range of stock price expectations has varied daily over the past six months. The heavy dot in each day’s range is of the closing price on the forecast day. It separates the range into upside and downside prospects.

The row of data below the daily trend picture tells what prices are currently being seen as possible. And from a restricted sample of prior forecasts from the past five years, what could be gained or lost from being “long” in the security while following a simple but rigorous portfolio management discipline. A discipline described in the “TERMD explained” link in my SA blog.

How effective the MMs have been in forecasting for these stocks is a matter of market records, when conditions of uncertainty similar to today’s are examined. That was done in the row of data between the graphics of Figure 2. For ease of comparison, they are repeated and slightly expanded in Figure 3 for the more interesting stocks of Figure 1.

Figure 3

Source: Author

ERI has had 90 prior-outlook days (out of 1,133) where a little better than half of the full forecast price range lays above its then current market quote. The other segment, from $55.97 to $62.30, is only 42% of the full range from $55.97 to $70.87. We use this measure, which we call the Range Index [RI], as a comparative standard for expectation balances (between up and down prospects) for all stocks.

Using that RI of 42, the 90 priors for ERI produced net gain %Payoffs under TERMD of +11.5%. Of the 90, 84 were profitable, either reaching or exceeding the price target at the forecast time (now $70.78) by or before the next three months after the forecast. But losses in the other six slightly reduced those gains. This illustrates the importance of needing strong Win Odds experiences at current RI levels.

A comparison of the prior RI 42s actual net gains of 11.5% with the present forecast of +16.1% suggests fairly good credibility for the current outlook: +0.83 (out of 1.00) as indicated at column [N] of Figure 3. Any such Credibility Ratio outside of 0.75 to 1.25 discourages acceptance of the current forecast [E]. The conservative approach is to base forecast evaluation comparisons on Realized Payoffs [ I ] rather than Sell Targets.

Real risk evaluation

So much for the “good side” of a buy proposition; what about the “bad side”?

As we condition the credibility of the upside price change forecast by comparison with actual experience, so too do we look to see how bad the downside might get. But with concern only during those “long” holding periods when committed capital would be at risk under the TERMD discipline. All other periods are irrelevant, shocking as they may be.

Figure 1’s data row tells what ERI’s worst-case price drawdowns have been -5% (an average of them) during all of each actual exposure period when they were to be held. What matters is how bad a fear of loss may get induced any time, not just whether or not it existed at the end of the holding. Investors will have varied reactions to the exposures, so there is no way to evaluate potential risk impact by historic outcomes. But some useful guidance may be provided by having knowledge of the maximum degree of intensity possibly becoming present.

Integrating the Good and Bad

One logically-simplified way to address the combination of stock price risk and reward is to weight each part by its probability and combine the two. The “Win Odds” of profitable position odds here for ERI of 93 out of 100 offer such a probability. One minus those odds, or 100 – 93, provides the loss probability weight. Thus .93 times +11.4% plus 0.07 times -5.0% produces a weighted net payoff of +10.3%.

To make this style of evaluation more comparable between varied investment opportunity situations, an integration of the likely holding periods used in the calculation is helpful. For ERI the average number of holding days required by all 90 positions of the sample was only 30 market days out of the maximum 63 possible, because of the high proportion of upside target prices reached. AVID’s high loss frequency had the opposite effect, 59 days.

A standard evaluation measure used in many capital planning decision situations is the expected net payoff stated in “basis points” of 1/100ths 1% per day of capital involvement. On a 365-day calendar year, +19 bp/day when sustained for a year doubles the original capital, or a CAGR of +100%. When a smaller-count of 252 market days makes up a relevant year, the fewer days are each proportionally more powerful, so only 14 bp/mkt day does the 100% doubling equivalent.

Comparing Investment Alternatives

Comparison is the essence of evaluation. If the investing objective is to make capital as productive of future spend-able amounts as possible, using an odds-weighted bp/d yardstick can be helpful.

To that end, Figure 3 includes the relevant MM forecasts and their prior outcomes for ERI, BILI, and over a dozen other Biotech Developer stocks. For broader perspective, a market-index proxy of the SPDR S&P 500 Index ETF is provided, along with the average of some 2,650 current-day MM price-range forecast issues. A ranked set of the day’s likely 20 best of those near-term wealth-building stocks under TERMD portfolio discipline provides a sense of what may be the best opportunities..

All of these comparisons in Figure 3 have the same basic data as included in the row of Figure 1 for ERI. That is expanded by the columns [O] through [R] to provide for odds-weighted bp/day price-prospect evaluation comparisons.

Please note that ERI has a history of superior Win Odds [H] at its current MM forecast RI [G] of 42, and each other stock’s outlook is the product of its own RI. ERI’s forecast credibility [N] is higher than most others because its achieved payoff [ I ] is above most others.

That combination puts its net Odds-Weighted return [Q] higher than most others. Its Days Held of 26 widens that advantage to all cases with an implied basis points per day of +34.

Competition from the market-index alternative SPY at this point in time is rather limited because of an unenthusiastic upside target outlook of only +4.5% at a CAGR of only +10%. That is even below overall forecast population of 2,659 MM with its average of +13.4% expectations, which under prior TERMD produced modest net gains of +2.9%.

As usual, all is not gloom among that large population, where the best-looking 20 stocks appear better than the other 2639 at [Q] and [R]. For further information please check my website here on Seeking Alpha.

Conclusion

Eldorado Resorts’ stock presents a strong competitive case to be bought now as a means of near-term building of portfolio capital value while maintaining portfolio diversification.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ERI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations. We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So, our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name.

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2020-02-16