Last week, we looked at the reasons why investors should short Red Rock Resorts (RRR - Get Report) ahead of the company's initial public offering lock-up expiration, but here is one more: One insider, Deutsche Bank, has become a very motivated seller.
Some of the reasons to short the stock that were highlighted last week include the large number of insider shareholders and the positive performance of the IPO.
Red Rock Resorts shares could get rocked hard if even only some of the insiders sold their stake, as insiders hold a huge portion of the approximate 115.9 million shares outstanding.
Formerly known as Station Casinos, Red Rock Resorts develops, manages, operates and owns casino, gaming and hotel properties, primarily in the Las Vegas area. Its properties include Boulder Station, Green Valley Ranch, Palace Station, Red Rock Casino and Sunset Station.
The company also has gaming facilities in northern California and western Michigan.
Its portfolio includes 53 bars and lounges, 282 bowling lanes, 21 casino and entertainment properties, 53 bars and lounges, 4,041 hotel rooms, 26 live entertainment venues, 96 movie screens, 19,300-plus slot and video poker machines, and 302 table games.
The company's pre-IPO shareholders, directors and executives hold previously restricted shares of 88.6 million, and when the lock up expires next Monday, it will be their first chance to sell. Their stake significantly dwarfs the 27.35 million shares offered to the public during the firm's IPO, so a few sellers could move the stock significantly.
Deutsche Bank is a significant shareholder with a 17% stake in Red Rock Resorts. And Deutsche Bank is under the gun when it comes to cash: The $14 billion fine that the Department of Justice is seeking to levy against the bank could dramatically affect its cash reserves.
As Reuters has pointed out, Deutsche Bank's options for raising this kind of cash are extremely limited.
It would make sense for Deutsche Bank to sell its position in Red Rock Resorts, as the IPO has performed well, and the lock-up period ends soon.
Red Rock Resorts' April 27 IPO priced at $19.50 a 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, though they saw a sharp sell-off and then a recovery last month. They are trading at more than $22.
Ken Liu, an analyst with UNITE HERE Gaming Research recently pointed out the need for cash.
"Deutsche Bank is in dire need of additional capital, so we expect them to sell off their Las Vegas casino stake as soon as they can on or after Oct. 24," according to Liu. "Deutsche Bank investors should certainly welcome the cash infusion and capital boost that can come from selling and exiting the casino assets."
Deutsche Bank's woes, the large number of Red Rock Resorts insider shareholders and the IPO's positive performance are the recipe for a sell-off when the lock-up expiration occurs. Investors should establish a short position before then.