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Double Down on MGM or Cash in Your Chips?

Lawrence Lewitinn
Talking Numbers
Double Down on MGM or Cash in Your Chips?

Should you be doubling down on MGM or is it time to cash your chips in?

Talking Numbers viewer Tony (@TurbuGumbo) asked @CNBCNumbers on Twitter to look into MGM and we’re happy to do it for him.

MGM was once worth more than six times what it is today. That was back in 2007, when it was involved with Dubai World in the largest real estate project in North America: CityCenter. The problem was, MGM didn’t exactly have all its financing together for the deal. When the markets dried up for money, MGM was stuck.

To make matters worse, the collapse in California’s real estate market hit MGM particularly hard. Vacationers in California had less money to spend in Vegas. In other words, this was the casino’s perfect storm.

Fortunes have changed recently for the company which owns properties such as the MGM Grand, the Mirage, the Belagio, and Mandalay Bay to name a few. A huge part of the company’s value, says one buy-side analyst speaking on background, is Macau, the former Portuguese colony in China that has become the destination of choice for many Asian gamblers.

“Macau is the reason why this stock isn’t at $10 per share,” the analyst said. “It’s many times the size of Vegas and it’s growing faster.”

Still, a Vegas recovery also helps the casino. Analyst David Bain of Sterne Agee recently upgraded MGM as a buy. Bain recently found that there’s a 93% correlation between the “vistors-to-available-rooms” ratio and the company’s pre-tax earnings (EBITDA), the measure most analysts use to value a gaming company. And that ratio is going up.

But do the charts agree with the guy at Sterne Agee?

We asked Abigail Doolittle, Technical Strategist at The Seaport Group and CNBC contributor, and J.C. O'Hara, Chief Market Technician at FBN Securities, to analyze the charts. See the accompanying video for their thoughts.