Although the global economic environment has shown signs of strength at times, the recovery remains rather uneven overall. For many, however, the economic climate has little bearing on whether or not they continue to feed their vices. And some investors look to capitalize on these “sinful” sectors. But the Gaming Industry may not quite fit the vice mold so smoothly.

Vice stocks consist of those within sectors such as alcohol, tobacco, and gaming. The draw to this kind of investment is largely the idea that people will continue to feed their vices regardless of the economic climate. In addition, the top players in these vice industries tend to have solid grasps on the markets they serve, providing most decent levels of pricing power, while making it difficult for smaller companies to build their franchises.
In reality, vice stocks aren’t necessarily recession proof, and each industry faces its own set of unique obstacles, and the belief is that appealing investment opportunities can be found in vice stocks during an economic downturn, as well as a recovery.

We have already reviewed various short- and long-term opportunities within the Tobacco Industry and Beverage Industry. This time around, we look to score profits at the hands of the one-armed bandits, the no-limit tables, and the neon lights of the Gaming Industry.


First, it should be noted that the Gaming Industry does not fit the same vice mold as its Tobacco and Alcohol counterparts. Indeed, the group is much more at risk of overall pullbacks amid economic downturns. Sure, many will continue to feed the gambling vice, but with tighter consumer and corporate budgets arising during an economic slowdown, gambling and leisure-related revenues are bound to come under pressure.

The companies here continue to diversify their entertainment and gaming offerings, which has helped many sustain decent hotel occupancy rates even during slow leisure travel periods. But, all things considered, it is very difficult to label this collection of stocks as recession proof, much more so than it is the aforementioned pair.
Throughout the recent recession, investors traded these shares lower, as they did the broader overall market. There were some resilient stocks within this group that held up comparatively well. But, on the whole, these shares did not likely shield investors much from the recent market regression.

Since the market’s turn, however, those that held on may be smiling a bit more. And looking ahead, there are some catalysts that have investors shining quite an optimistic light on selections here. Indeed, the economic recovery has helped reboot revenues and profitability for these companies. Moreover, the global growth of gambling hotspots, specifically in Asia, has been a driving force behind healthy shareholder gains, of late.

Before we look at specific stock selections here, there are a few shared characteristics prospective investors may want to consider before browsing the Gaming Industry. Primarily, those interested must be willing to take on some risk. Indeed, the Tobacco names all had Betas well below the market average, while most within the Alcohol group did, as well. The Gaming stocks, however, do not meet the same criteria, with WMS Industries’ (WMS) Beta of 1.2 being the closest to the market average.

At the same time, investors must be aware that these shares, as a whole, have had somewhat of an erratic trading history. Thus, most hold very low Price Stability scores, and the Safety ranks are all Average (3) or Below Average (4).

Keep in mind, however, this industry houses a name that has traded up over 200% year to date through mid-November, with another over 80% higher since the calendar turned.

Indeed, Las Vegas Sands (LVS) and Wynn Resorts (WYNN) have been the casinos’ shining stars in 2010. For LVS, the performance of its properties in Macau and Singapore are the driving forces behind the substantial top- and bottom-line gains it should generate this year. The same can be said for Wynn, which continues to gain a foothold in Macau’s affluent client pool.

The growth in the Asian markets has helped the two issues separate themselves from the rest of the casino space, of late. Coming out of the recession, the domestic market has been faced with excess supply, which can largely be tied to the recent waves of mega resorts constructed in Las Vegas. The Asian gambling hotbeds should remain vital sparks to both Las Vegas Sands’ and Wynn‘s operations over the longer term, as well.

Although the other property players have not been able to keep pace with LVS and Wynn, the sector’s rebound has not bypassed them. In fact, shares of Boyd Gaming (BYD), Penn National Gaming (PENN), and Pinnacle Entertainment (PNK) have all experienced double-digit percentage increases so far this year. However, with the near-term casino picture less bright in the U.S., investors have not been as aggressive in purchasing these shares.

Then there is MGM Resorts (MGM), with its domestic operations sluggish and its share of the Macau market still small. The stock has had a decent year, but the long-term prospects here remain lackluster. There is also the risk involved with an MGM investment, as the company continues to face liquidity concerns.

All told, those interested in entering the casino segment, may not necessarily have missed the boat. Although LVS has had a stellar run, the stock is still trading far below the peak it reached in 2007. Risk-tolerant, long-term investors may see a greater ceiling for this issue.

Wynn, meantime, stands out from the group in that it is only one of two stocks in the industry to offer a dividend. In addition to the recent introduction of a quarterly payout of $0.25 a share, the company has paid special yearend dividends since 2007.

On the other side of the Gaming Industry are the technology names. While the casino stocks have soared in 2010, shares of lottery and slot machine manufacturers have not been anywhere near as impressive. In fact, the machine makers group has produced more losers than winners this year. Demand for new products has been slow to recover, and investors’ expectations, in turn, remain muted.

This sector, for the most part, is likely to start to regaining a little momentum in 2011, as gaming systems demand should start to improve. That said, product development is crucial in this highly competitive group. New machines are constantly being introduced, given that consumer tastes are always changing.

As a result, those seeking some depressed values may want to focus their search on this side of the Gaming names. Scientific Games (SGMS) has been the industry’s hardest hit stock in 2010. For that reason, it now offers the widest 3- to 5-year appreciation potential in the group. These shares hold a Safety rank of 3 (Average), which may slightly ease the concerns of the more-conservative bunch. International Game Technology (IGT) and Bally Tech (BYI) fall in the same boat, offering above-average prospects out to 2013-2015. International Game Technology can share the boast with Wynn as being the industry’s only other dividend payer, recently sustaining a yield in the 1%-2% range.

In sum, the Gaming Industry may not be as recession proof as the other vice choices. And although this group does house a number of more-speculative issues, compared with the other vice industries we cover, there are different stocks here that may well appeal to a range of investors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.