LVS, MGM Tabbed As Rising Rates Winners By BofA

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Posted on: March 3, 2023, 04:44h. 

Last updated on: March 3, 2023, 04:51h.

Ten-year Treasury yields closed at 3.964% on Friday, and earlier this week, two-year yields touched 4.9%, the highest levels since 2007. Those are signs rising interest rates remain a potential thorn in the side of corporations and investors.

MGM rising rates
Bellagio Las Vegas. Operator MGM and Las Vegas Sands can benefit from rising interest rates. (Image: MGM Resorts)

In theory, higher interest rates are drags on casino operators and their respective customer bases, but Bank of America strategist Savita Subramanian sees things differently. She and her team recently ran a screen of stocks with the highest and lowest nominal interest rate beta — a measure of a stock’s positive or negative sensitivity to rising rates. On the better side of the ledger, Las Vegas Sands (NYSE: LVS) and MGM Resorts International (NYSE: MGM) are among the top 20 names.

Screens are based on a regression of stocks’ monthly excess returns vs. monthly changes in the nominal 10yr yield, including only those stocks with beta (slope) that is statistically significant at the 5% level and who have at least 10 years of monthly returns,” wrote Subramanian.

Sands and MGM are the only gaming names in the top 20 in terms of potentially being helped by rising nominal interest rates, while no firms from the industry appear on Bank of America’s bottom-20 list.

More Rate Help Could Be on the Way for LVS, MGM

Entering this year, many market participants were optimistic the Fed would raise interest rates a few times early in the year to the tune of just 25 basis points each time and, eventually, step back from that policy. A spate of recent economic data indicates the central bank may not have that luxury.

“Recent economic data (payrolls, retail sales/consumption, PCE/CPI/PPI) suggests rates are likely to be higher for longer,” J.P. Morgan strategist Dubravko Lakos-Bujas wrote in a report. “The bond market has been increasingly pricing-in a more hawkish scenario, but the equity market less so.”

That’s not encouraging news for any number of industries and sectors, but shares of Sands and MGM are proving Bank of America’s thesis. On the back of an 8.28% gain this week, LVS is up 26.48% year-to-date. That after ranking as one of the best-performing gaming stocks of 2022.

MGM surged 7.77% this week, extending its 2023 appreciation to 36.92% — an ascent aided by strength on the Las Vegas Strip as well across its regional casinos and at its two Macau venues.

Sands’ nominal interest rate beta is 11.6, according to Bank of America. Just six stocks rank higher on that metric. MGM’s nominal interest rate beta of 7.5 is good for the 18th spot on the bank’s list.

Real Estate Takeaway from BofA Rankings

Historically, real estate is one of the sectors most negatively correlated to rising Treasury yields. Not surprisingly, roughly 40% of the Bank of America list of nominal interest rate beta offenders hail from that group.

For investors interested in listed gaming real estate investment trusts (REITs), neither Gaming and Leisure Properties (NASDAQ: GLPI) nor VICI Properties (NYSE: VICI) are on that list, indicating those casino landlords may have more insulation against rising rates than some market participants assume.

Realty Income (NYSE: O), which owns the property assets of Encore Boston Harbor, is a nominal interest beta offender, but its gaming exposure is limited to the aforementioned venue.

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