Biden's Capital Gains Tax Plan Could Hurt Caesars And Domestic Investors Tweak Penn

Posted on April 27, 2021, 11:03 AM

Last updated: April 27, 2021, 11.30 h.

President Biden recently proposed the largest tax increase in the US in three decades. If this plan goes into effect, it could impact a number of stocks, including Caesars Entertainment (NASDAQ: CZR) and Penn National Gaming (NASDAQ: PENN).

The Made in America tax plan almost doubles the current rate of capital gains for the richest Americans. The White House wants to move that rate to 39.6 percent from 20 percent. If this proves to be the new standard, investors who own stocks that make significant returns over time may be forced to sell them before Biden's proposal goes into effect.

Earlier increases in taxes on capital gains have been linked to declines in stock prices and household capital allocations, according to Goldman Sachs. "In addition, the high-dynamic" winners "who provided investors with the most profit before an interest rate hike tended to be lagging behind.

"Winners on a big scale" is a description referring to Caesars and Penn. Gaming operator shares rose 444.22 percent and 540.28 percent, respectively, over the past year, when markets have valued themselves in recovery from the coronavirus pandemic and the online sports betting boom, among others.

Why Caesars, Penn may be vulnerable

As mentioned above, Caesars and Penn have recorded impressive gains over the past year. During this period, a pair of recent S&P 500 stock quotes are two of America's best stocks, games or otherwise.

Harrah's and Ameristar are two of the top five companies on the Goldman list with the highest annual capital gains and the only gambling-related shares in the group. The other three are clothing stores Gap and L Brands and electric car giant Tesla.

Neither Caesars nor Penn appear in the groups that make the biggest three- and five-year capital gains. But operator Flamingo is in the top five of the most significant 10 - year capital gains, according to Goldman Sachs.

"Tech and Consumer The discretionary sectors have been the largest source of capital gains in the US stock market in the past 3, 5 and 10 years." says the bank.

Gaming stocks, including Caesars and Penn, are in the cyclical consumer sector.

Good news, maybe a little bad news, Za

For investors who currently own Caesars or Penn, the good news is that the Biden Capital Gains Tax Plan affects a small percentage of investors and US households. About three-quarters of US equity investors do so under retirement plans such as 401 (k) and Individual Retirement Accounts (IRAs). These vehicles are exempt from the White House's Tax Increase Plan.

However, these two game names aren't entirely out of the woods. Penn in particular has been struggling recently, living 34.64 percent under 52 - the highest week.

Additionally, the combination of large 12-month profits that can force investors to make profits irrespective of tax policy, and fierce competition in the iGaming and online sports betting segments, may induce some market participants to reduce exposure to Caesars and / or Penn.