Can I Repeat This +150% Gain By Betting on Gambling Again?

I served on the Board of Trustees for an educational non-profit organization for six years. The trustees were responsible for investing the organization's $5 million portfolio, which was used to fund college scholarships.

I wasn't exactly a spring chicken, but the vast majority of the trustees were 20 years my senior. They had been looking for new blood -- someone who could add some safe growth stocks to their otherwise income-oriented portfolio.

Toward the end of my term, I found a stock that would serve the organization well, long after my departure. Although I have to say, my recommendation was met with skepticism.

"You want us to buy a gambling stock?" They seemed horrified.

My suggestion was the casino operator, Harrah's. The stock had been languishing, driven by the fear that casino revenues wouldn't rebound after the post-9/11 downturn. But Harrah's was already growing revenues again by double-digits at the end of the first quarter of 2002. The company also had real estate holdings that were grossly undervalued.

I'm happy to report that we bought Harrah's somewhere in the mid-$30 range. It appreciated every year the organization owned it. On Friday, September 29, 2006, the share price was $66.42. The following Monday it surged to $75.66 after Harrah's received a buyout offer. The non-profit finally received $90 a share after Harrah's was bought by two private equity firms.

I like knowing there are kids out there that got help paying their college tuition, thanks to that +150% gain on Harrah's.

Will the Casino and Gambling Surge Repeat Itself?

Casino and gambling stocks are beaten down again, battered by the recession and falling property values. It may take a lot longer for companies to rebound this time around.  

Builders were getting used to the fact that the population in Las Vegas' Clark County was growing about +5% a year since 2000. But Clark County actually shrunk by -0.5% last year. Las Vegas had the second-highest foreclosure rate in the nation last year as home prices dropped -50% off their peak in 2006.

There's a lot of empty real estate in Las Vegas now, making it unlikely that companies like MGM Mirage (NYSE: MGM) will fill the new condos they have coming online. 

In the last few years, a number of casino companies took on a lot of debt to fund major expansion projects or to pay for leveraged buyouts. Station Casino is only the latest of many casino companies to declare bankruptcy, unable to either service or refinance their massive loans.

It's not all bad news. Las Vegas casino hotel occupancy rates are still hovering in the 86% to 94% range, albeit at much lower room prices. And people still like gambling, although they are keeping a closer eye on their wallets.

But better yet, not all casinos are dependent on Vegas. There are two places where gambling is thriving, even in this recession.

What Would I Buy Now?

Gambling in Macau has been legal since the 1850s, but it was only in 2001 that the government opened up casino operating concessions to a few outsiders. Wynn Resorts (Nasdaq: WYNN) opened Wynn Macau in 2006 and plans to open its second property there next year. While Wynn owns two properties in Las Vegas, its Macau property is helping to keep the company in profitable territory.

Although Wynn does have a lot of debt, it also has about $1 billion in cash, which should easily service its loans. Wynn's stock has rebounded well off its lows, but is still about -50% off its 52-week high. Don't get me wrong, Wynn is still a bit of a gamble. But even if the Vegas rebound is a long time coming, Wynn will be there when it does.

There's one place even more profitable for gambling companies than Macau: the Internet. Internet gambling in the U.S. falls somewhere in a legal gray zone. Publicly traded online gambling companies have avoided the U.S. market since the passage of a law that bans bank transfers for internet gambling in October 2006. But there are plenty of countries where it is perfectly legal -- and very profitable.

One of my favorite online gambling companies is 888 Holdings (888.L), traded on the London Stock Exchange. 888 was one of the companies that had to give up its U.S. market revenue in 2006. But it's done an outstanding job of building back its business since then. While 888 wasn't immune from the recession, it is already seeing a return to its pre-recession performance -- and proved it by growing its operating income by +7% in the second quarter. The company has $100 million on its balance sheet and zero debt.    

Also, there is a bill in Congress that would officially legalize and regulate the online gambling industry here in the U.S. If that bill passes, 888 is going to be hard to stop.

They say the house always wins. In the long run, I suspect that's true. But for right now, there's only two houses I'd bet on.     

Always Searching for the Next Great Idea...

-- Amy Calistri
Editor
StreetAuthority Stock of the Month

Berkshire Hathaway (NYSE: BRK-A) returned to profitability in the second quarter on gains in derivatives tied to world equity markets. The company posted $3.3 billion in net income.

-- Bloomberg

Investing Trivia

Which of these health care companies delivered an annualized +24.5%, about twice the average historical return of the S&P, in the past 10 years, and is poised to add billions more to its bottom line if Washington moves more people onto private insurance?

A.) Continucare CP
B.) Neostem Inc.
C.) Mednax
D.) DaVita
E.) MDS Inc.

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