This assessment is based on the positive performance of the company's initial public offering so far and the number of insider holders of the stock. Shares have risen since Red Rock Resorts made its debut, and at least some insiders will want to cash in their chips at the first opportunity.
In order to benefit from the dip when the lockup expires and allows insiders to sell their shares, investors should establish short positions this week and next and cover their short positions when the lockup expires.
Formerly known as Station Casinos, Red Rock Resorts owns, develops, operates and manages hotel, casino and gaming properties, primarily in the Las Vegas area. Its properties include Red Rock Casino, Green Valley Ranch, Sunset Station, Palace Station and Boulder Station. The company also has gaming facilities in western Michigan and northern California.
Its portfolio includes 21 casino and entertainment properties, 19,300-plus slot and video poker machines, 4,041 hotel rooms, 302 table games, 53 bars and lounges, 113 food and beverage venues, 96 movie screens, 26 live entertainment venues and 282 bowling lanes.
During the second quarter of 2016, Red Rock Resorts announced that its subsidiary, Station Casinos, entered into an agreement to acquire the Palms Casino Resort for a total of $312.5 million. The company announced the closing of the acquisition on Oct. 3. In addition, Red Rock Resorts completed a $2.4 billion refinancing of the Station Casino credit line, which added a higher borrowing capacity, reduced borrowing costs and added additional financial flexibility.
Currently, approximately 40 major casino and gaming properties are located on or near the Las Vegas Strip. Red Rock Resorts faces competition from both restricted and nonrestricted sites, with restricted gaming casinos having 15 or fewer slot machines. The largest casino companies are Las Vegas Sands, MGM Resorts, Caesar's Entertainment, Wynn Resorts, Penn National Gaming, Pinnacle Entertainment and Boyd Gaming.
Red Rock Resorts' April 27 IPO priced at $19.50 per share, at the midpoint of its expected range of $18 to $21. The stock closed on the first day of trading at $18.70. Shares have risen since then, although they saw a sharp selloff and then a recovery in September. They currently trade at about $22.60.
Insiders could be ready to cash in on their success.
Until the company's lockup period expires, insiders are restricted from selling in the wake of the IPO. Insiders hold a large portion of the approximate 115.9 million shares outstanding. RRR's pre-IPO shareholders, directors and executives will have the chance to sell previously restricted shares, which number 88.6 million, when the lockup expires. This figure dwarfs the 27.25 million offered to the public at the company's IPO.
Powerful insiders include 12 named executives. Shares are also owned by seven firms including FI Station Investor, Fertitta Business Management and Oaktree SC Investments.
The Securities and Exchange Commissionhas highlighted how IPO lockup expirations can cause a marked decline in a company's stock price: "If you are considering investing in a company that has recently conducted an initial public offering, you should determine whether the company has a lockup and when it expires. This is important information because a company's stock price may drop in anticipation that locked up shares will be sold into the market when the lockup ends."
Analysts at this author's firm, DRD Investments, have specifically identified a 4.2% slide on average from the period lasting from about 11 days before the lockup expiration to the day of the expiration. Declines are more likely in the case of companies such as Red Rock Resorts, which have seen their stocks increase in price since their IPOs and have a diverse set of insiders. If even some of them decide to sell, the resulting oversupply of shares in the market could send Red Rock Resorts' stock price tumbling down.
We suggest selling or shorting ahead of the event to take full advantage of impending declines.
This article is commentary by an independent contributor. At the time of publication, the author had a short position in shares of RRR.