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Why Churchill Downs Stock Rocketed 32% Higher in May

What happened

Shares of horse track and casino operator Churchill Downs (NASDAQ: CHDN) took off in May, rising by an incredible 32% during the month, according to data from S&P Global Market Intelligence. Impressively, the stock was down just 3% through the first five months of the year, beating the S&P 500 index's 5% loss over the span.

So what

The interesting thing is that Churchill Downs didn't start off the month of May even remotely close to the S&P 500. (For reference, the S&P only gained around 5% in May.) In fact, at one point in March, the stock had lost around half of its value since the start of the year. What changed was investor perception of the gambling space. When the effort to contain the spread of COVID-19 started, non-essential businesses were closed and people were asked to practice social distancing. The facilities that Churchill Downs operates were basically shut down.

Image source: Getty Images.

In April and even more so in May, investors started to see silver linings on the storm clouds as the efforts to contain the coronavirus appeared to have gained traction. There has also been progress on a potential vaccine for the illness. And now the U.S. has started to reopen for business. Notably, Churchill Downs was able to restart horse races at its namesake property on May 16 without spectators. It then reopened a handful of offtrack betting locations on May 18 and two casinos in Mississippi on May 21. Although that's a far cry from "normal," it's a vast improvement over being completely closed. Investors reacted positively to the news.

Now what

There's still a great deal of uncertainty around what gambling will look like once the U.S. economy is fully reopened. There will be added operating costs because of heightened cleaning efforts, and attendance will likely be limited by social distancing guidelines. In other words, this issue is far from over. Worse, the efforts to contain COVID-19 are likely to push the U.S. economy into a recession, which isn't usually a good environment for casino stocks. Long-term investors should expect continued volatility here and the very real possibility of additional bad news.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Churchill Downs. The Motley Fool has a disclosure policy.


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