Testy Tuesday – Levels Hardly Holding Lofty Goals

What will it take for us to make the next leg up?

As you can see from Dave Fry's Dow chart, wer're stuck in that range we've been in since May, testing the 15,700 line and looking, always looking for a good reason to finally break higher.  Last November, when we had our Philstockworld Investor Conference in Las Vegas, we reviewed the Dow components, one after the other and found a lot of trades we found undervalued.  This year, with the conference this Sunday/Monday, I think we may end up discusssing what to short.

I'm in Las Vegas now and there's 1.5% more traffic than last year at the airport.  The hotels are about 3% more full but there are hundreds of people now walking the street trying to sell half-priced show tickets and there are still empty store-fronts at the malls and there are very few restaurants you can't just walk into and get a seat anytime.

Yet LVS is up from $40 last November to $70 today, WYNN (we're short) is up from $100 to $165, MGM from $9.15 to $19.29 and CZR (we're long) from $4.60 to $17.05.  CZR was our top casino pick last year and you can see why (and they topped out at $26.50!) but, in general, the gains in the casino business are more about Macau, China than they are about Las Vegas, Nevada.

And that's fine – as investors, we shouldn't care where revenues and profits come from, as long as they come.  But, what we SHOULD worry about is whether or not the revenues and profits justify such massive increases in the PRICE (not VALUE) of the stocks we're trading.  WYNN's earnings went from $5.36 last year to $6.95 this year on a 6.2% increase in total sales so a lot of that 30% gain in profits was from cutting back spending, not proper growth.  Next year, with costs cut to the bone, the casino operator expects to make $7.25, up a mere 4.3% from this year's impressive gains. 

Yet WYNN is trading at $166.49, a whopping 24 times earnings.  That's a fair valuation for a company that IS GROWING 20-30% a year, not just HAS GROWN 30% one time.  

IN PROGRESS