A few days ago I read where some major brokerage said, regarding LVS, that they could never recommend a stock that might easily go to zero. Which is of course sucker talk. And it made me wonder if enough people subscribe to that illogic it might mean LVS is a good buy. I've mentioned such ruminations before, specifically regarding the yet to be played out MNKD. But this case seems easier to figure.

I propose the following gambling scenario:

You buy LVS for 2.20 and hold it for exactly five years. Then you sell.

Of course this wouldn't automatically be your strategy. But if this strategy won then so would an improved strategy.

I believe that after five years it is extremely unlikely that LVS will be a single digit. Unless it is zero. But zero is a major possibility. Am I wrong about those two assumptions?

So this leads to two questions.

1. What is the probabillity that it goes to zero before five years from now?

2. IF it doesn't go to zero what would you estimate its mean price would be five years from now? This mean or EV price does not include those time it is zero.

Now take two thirds of your answer to number two. That should make up for the money you could have earned elsewhere.

We are left with a simple pot odds question. For instance if you think there is a 75% chance LVS goes to zero and if it doesnt it will average being fifteen bucks, you would be getting about 7.80 to 2.20 on a 3-1 underdog.

Does anybody have a strong opinion about the answer to my two questions?

I think you are overestimating how much LVS ever made and are underestimating how large a stock it still is marketcap wise.

In the years 2005, 2006, 2007 it averaged 280 mil in net income. id consider those profits to be pretty normalized. It traded at a market cap of 93 bil because of all the hype surrounding macau. It never should have been there in the first place. So assuming it does get out of bankruptcy and goes back to averagin 280 mil a year income, it will probably trade in a range of 2.8 bil to 4.2 bil market cap whereas its now at 1.46 billion.

To find the odds of going bankrupt the best you can do is check the cds market.

Your are essentially asking if there is a risk premium in these low priced stocks due people's fear. Having shorted FNM and FRE I can tell you its not that simple, it was DEAD CLEAR that those companies was going to get wiped out by the government(bernanke said shareholders couldn't get bailouts like one week earlier and Paulson had wacked BSC shareholders) yet that stock put gigantic rallies and people would buy it just because the price was low, meanwhile the bonds of these companies were EXPECTING action from the government yet the stock market thought the action would benefit them even though the authorities had signaled otherwise

I see this all the time, people buy brand big names when prices get low for no reason, they usually MAKE UP reasons like 'they are too big to fail' 'they have been around for so long'

yeah, i'd say this is the bigger bias, making it more likely LVS is overvalued (simply based on analyzing biases)............. curious how many of these very high CDS stocks survive. it does seem like the timing for defaults to explode keeps getting pushed back. surely this year though.

i don't understand why you bother with all that. you really think that there aren't thousands of black boxes, quants, CFAs, etc out there that haven't done valuations/computations accounting for all kinds of probabilities on this stock (as with every other stock) a hundred times over? you think everyone else is led by fear and that you're the level headed mathematical one? you don't think that perhaps teh price of the stock takes into account all kinds of probabilities and what not?

hisotrically, no, alot of the time hes right

Yes. The market price of an equity is always efficient!

Scoreboard.

It is not the mathemetician in me that thinks they might not be doing the math. It is the professional gambler in me. Mathmeticians will take 10-1 on an eight to one shot if they feel certain about that eight to one. But I am not sure they want to screw with probabilities that are themselves uncertain. Do you think those black boxes know how to take into account how cooperative the goverment of Singapore will be. Or whether an old man will be willing to infuse another billion of his own money, even if it is minus, EV to try to rescue his stature?

Meanwhile no one has ventured an opinion about my two questions.

1. when a stock is close to zero in price the company cannot borrow easily so its chances of going to zero are greater than a person may think.

2. its mean price is likely to be 15 or so in present shares. the worry would be that to keep from going under they take on a partner and dilute the stock outstanding. so you may find your shares worth still only 2 bucks.

15? Where did you come up with this number? That would mean you expect them to earn substantially more in the future than they did in the good years of 2005-2007 when vegas boomed.

CDS prices aren't perfectly correlated with stock price, and there is about a 6 month lag on average for CDS spikes to show up in stock price. For any one firm, you'd have to look at the debt maturities and try to estimate future cashflow.

I don't have access to Markit on my laptop but could someone provide a 5 yr swap curve for LVS? Absent that, I would look at Moody's March 11 downgrade of LVS from B2 to B3 (B to B-), and guess it's in the range of 1500-2000, or a 15-20% cumulative chance of default in that time frame. Given this I'd probably short the stock, as well as any gambling-related venture. Casinos nowadays derive ~50% of revenue from retail, restaurants, and other things that suck in a recession so I'm very skeptical of their ability to remain cashflow positive.

Still?

lol

oh snap

also, ahnuld, why do think you got this one so wrong? I am actually interested in your thoughts, not trying to slam you or anything

haha good brag-bump by Sklansky.

Did you buy any?

why do you say I got it wrong. I said theyll earn about 280 million a year in net income. please show me where they have made more than that in a trailing 12 month period since my post.

Referring to this

Can someone explain to a ****** like me how casnios have such high valuations. LVS is valued at 30 billion dollars market cap yet they have 10 billion dollars in debt, don't have a positive cash flow, or a net income as of today. Even in its hay day of 280 million a year income, the 30 billion dollars market cap seems high, is its growth suppose to be that spectacular? I just looked at WYNN and I guess its valuations are a bit lower, but the same fundamental number differentials...

LAS VEGAS SANDS CORP

43.65 -1.61 -3.56%

Volume 38 M
30-Day Avg Vol 41.4 M
Difference -8.20%
Market Cap 29.88 B
Mkt Cap Chg -1.1 B
Shares Out 684.73 M
% Shrs Traded 5.55%
1yr EPS Est 1.575

when you do a fundamental analysis, all you can try to do is predict how the business will preform. You cant predict how people will choose to value it.

i haven't checked the specific case at hand, but some of this might be due to value of licenses, especially in China. I've heard of people mention the casino companies as good proxy plays for China (their opinion, not mine)

The ROT here is lolz. LVS almost went busto, as did HET.

You wanna play the ROT game, kick yourself for not buying cheap, sig cash flow SBUX at $8 or even cheaper, rapidly growing no debt tons of cash on B/S LULU at under $5 with zero BK risk back then...

Seems kind of pointless then, but I assume you are aiming at being right on average, and this was just variance basically

no it is not pointless as in the short term the market can be crazy but in the long term it trades off fundamentals.