Penn National Sharp Sharpe Ratio Idea, Says Goldman Sachs

Posted on: December 21, 2021, 01:45h. 

Last updated on: December 21, 2021, 01:55h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Penn National Gaming (NASDAQ:PENN) is one of this year’s worst-performing gaming equities, as highlighted by a decline of nearly 46 percent. But Goldman Sachs believes the regional casino operator has rebound potential.

Penn stock
Barstool Sports founder David Portnoy would like to see Penn National stock recover. Goldman Sachs believes it can. (Image: Sports Illustrated)

The bank recently revealed its list of high Sharpe ratio ideas, and Penn National makes the cut. Investors use the Sharpe ratio to gauge a stock’s upside potential relative to its volatility. Goldman’s spin on the metric is Wall Street’s consensus price target on a stock and six-month implied volatility.

Going forward, the combination of rising rates but decelerating growth suggest factor volatility should continue,” David Kostin, Goldman’s chief U.S. equity strategist, said in a note. “Our High Sharpe Ratio basket contains stocks with the highest prospective risk-adjusted returns.”

The average price target on Penn National stock is $83.59, implying upside of 65.2 percent from current levels. Once a beloved gaming name, Penn resides 64.38 percent below its 52-week high.

Why It Matters for Penn Stock

Penn is following other gaming equities lower into year-end. The stock was pounded by valuation concerns and fears of slack travel stemming from the emergence of the omicron variant of the coronavirus.

While this is the time of the year when analysts drum up support for select equities ahead of the new year, Penn’s inclusion on the Goldman Sharpe ratio list is notable. That’s because the bank’s high Sharpe ratio picks have a track record of beating the broader market. The bank says these picks beat the S&P 500 in nearly two-thirds of six-month periods since 1999, doing so by an average of 243 basis points.

“Many of these stocks have significant upside to consensus price targets, given analysts may be reluctant to change their forecasts,” adds Kostin.

Penn is the only game in Goldman’s latest basket of high Sharpe ratio ideas. Eighteen analysts cover Penn, with 11 having bullish or very bullish grades on the stock. Another six are neutral, while one has a bearish grade on the shares.

Penn Stock Has Catalysts

Like its gaming brethren, Penn has levers it can pull to potentially engineer better equity performance in 2022. For example, the integration of the Score Media and Gaming acquisition gives the company a foothold in what’s expected to be an exciting sports betting opportunity set in Canada.

To date, the deal for theScore is Penn’s largest in the sports betting arena. It easily dwarfs the $163 million in cash and stock it doled out in January 2020 to buy 36 percent of Barstool Sports.

Speaking of Barstool: If Penn’s Barstool Sportsbook venture can prove to the investment community that it’s grabbing low to mid- double-digit market share in the markets in which it’s available with less marketing spend than rivals, investors could reward the stock in 2022.