Today's reaction by Wynn Resorts (WYNN) is exactly the type of thing that causes those of us who still deal in the dark magic of fundamentals to go batty.  I had been shorting Wynn (which let me reiterate is a very well run company) as it seemed to levitate day after day on hope and green shoots.  Or our favorite the US consumer is back - even if she does not have job.  Valuation was obnoxious - but still it went up. Despite being tied very directly to a still very damaged US consumer.  But you can't talk sense to a room of stampeding bulls... or their computers.  So we averaged up, and eventually when the stock came back to Earth a bit took a loss on our short.

During that period of ascent the news was light, and glee was in the air.  Government spending will save us all - the American conspicuous consumption culture shall return ... yee haw.  (see today's consumer confidence report for a reality check - the disassociation between Wall Street and Main Street continues)  Today, unfortunately for WYNN, they had to report actual facts and our dreams of the government ATM replacing the house ATM took a hit.  The stock has been hammered.  But this is the difficult think about investing... you can be very correct - ultimately.  But if your timing is not correct, it doesn't matter if you are eventually proven right.  You will have suffered serious losses and if you practice any sort of risk management you will have cut your losses. 

Even after today's sell off the stock is expensive... it's over 60x 2010 estimates... not 2009.  I said 2010. It was even higher a month ago. Even assuming analysts are clueless (always a good assumption) and are wrong by a factor of 50%, the forward PE is 45.  Assume analysts are wrong by 100%, the forward PE is 30.  But as we have seen, no one seems to care about valuation - as long as a momo stock is going in the right direction ... keep buying it.  But when reality strikes, just know there are thousands of lemmings trying to exit through the same small door.

Now we will see if that gap I was originally targeting in the $47 area will fill.  With the type of traders necessary to create a mirage long gone (the momo buys) I think the chances are quite good this will happen in due time.

Specific to Wynn they have been incredibly promotional - I saw an ad to fly from Pasadena to Las Vegas... with hotel included... on PRIVATE jet, for $800.  Not exactly a profit center. 

A snapshot of earnings, via AP

  •  The casino industry continues to struggle in the third quarter, with gamblers still clamping down on their spending. Such ongoing belt-tightening, coupled with increased expenses, pushed Wynn Resorts Ltd.'s profit down for the second consecutive quarter Tuesday.
  • While the casino operator experienced improvements in room, food and beverage and entertainment and retail revenue during the quarter, casino revenue declined. Gamblers have continued to spend less on table games and slots during the economic downturn as they keep a closer eye on their spending.
  • Costs have also crept up for Wynn, which is based in Las Vegas. The casino operator was more promotional during the quarter and saw its operating costs and expenses rise.
  • The company run by billionaire and major stockholder Steve Wynn said net income fell 33 percent to $34.2 million, or 28 cents per share, for the period ended Sept. 30. That's down from $51.2 million, or 49 cents per share, a year ago.  Excluding property charges and other items, profit was 33 cents per share.
  • ... said third-quarter revenue edged up 1 percent to $773.1 million from $769.2 million.

So what would you pay for 1% revenue growth with the additional bonus that green shoots shall spread across the American countryside in the quarters to come?  Apparently 70-80x earnings... before today.

[Jun 1, 2009: Fortune - Wynn Resorts - Bull or Bear?]

No position