Question of the Day - 17 October 2008

We answered this question a few months ago (see QoD 7/4/08), but given the recent freefall of the stock market, we thought it timely to revisit it. If you believe that casino stocks, which have been hit pretty hard by the crisis, will rebound to their previous heights, this is a pretty good time to buy; we haven't seen prices this low since right after 9/11.

The number of Vegas casinos owned by publicly traded corporations dropped dramatically last year, thanks to the private-equity buyouts of Harrah’s Entertainment and Station Casinos.

On June 16, Landry Restaurants CEO Tilman Fertitta announced that he was taking his company private, removing one more skittle –- the Golden Nugget –- from the Big Board. Aztar Corp., owner of the Tropicana, went off the stock market back in 2007, following its sale to Kentucky hotelier Columbia Sussex.

However, because of the way its debt is structured, Columbia Sussex subsidiary Tropicana Entertainment still files regular reports with the Securities & Exchange Commission –- as does Harrah’s, thereby providing a fair measure of transparency into how these companies continue to operate. Harrah’s, for instance, has been segregating its casinos between Harrah’s Entertainment and Harrah’s Operating Group.

As for those casino companies that are still publicly traded …

Boyd Gaming (ticker symbol: BYD) owns the Fremont, California, and Main Street Station downtown; Sam's Town, Gold Coast, Suncoast, and The Orleans, along with the Jokers Wild and Eldorado casinos in Henderson. Boyd has temporarily halted construction its first Strip megaresort Echelon Place, which was scheduled to open in 2010 on the former site of the Stardust. This project is a joint venture with Morgans Hotel Group.

Morgans (symbol: MHGC) has its own fish to fry, as well, having lined up $760 million in financing for an ambitious expansion of the Hard Rock Hotel & Casino, which it co-owns with its primary lender, DLJ Merchant Banking Partners, which holds 80% of the property.

Landry’s Restaurants (symbol: LNY) not only owns the Golden Nugget downtown but its sister property in Laughlin. While Fertitta’s buyout would involve 179 restaurants in addition to the two casinos, the latter represented 43% of Landry’s revenue, according to its most recent earnings announcement.

MGM Mirage (symbol: MGM) is the mother corporation for Mandalay Bay, Luxor, Excalibur, New York-New York, Monte Carlo, MGM Grand, Bellagio, Mirage, TI, Circus Circus, and Slots A Fun. It’s constructing CityCenter, is an equity partner in M Resort (under construction on far south Las Vegas Boulevard), and owns the vacant lot on the northwest corner of Sahara and the Strip, where it’s planning another metaresort, in collaboration with multiple joint-venture partners.

Crown Ltd. (NASDAQ symbol: CWLDF) is in the process of buying out privately held Cannery Casino Resorts, which owns the Cannery Casino & Hotel in North Las Vegas, is building Cannery East Side on the Boulder Strip, and manages the Rampart Casino in Summerlin.

Its shareholders having rebuffed several takeover attempts, Riviera Holdings, parent of the Riviera Las Vegas, still trades as RIV. Las Vegas Sands, owner of Venetian Resort Hotel Casino and its outgrowth, the Palazzo, trades as LVS, while archrival Steve Wynn’s Wynn Resorts goes by the ticker symbol –- what else? –- WYNN.

Another investment you might consider is International Game Technology, the slot manufacturer, which generally rises and falls with the casino-stock tide: ticker symbol IGT. Lately, two rival slot-maker stocks have been outperforming it: Bally Technologies (BYI) and Williams Gaming (WMS).

And if you want to invest in a mutual fund that specializes in casinos and gaming manufacturers, plus companies in the parimutuel, lottery, and electronic/video-game industries, look up the Ladenburg Thalmann Gaming & Casino Fund (ticker symbol: GACFX).

Here's an interesting article from today's Wall Street Journal titled "Stocks for Sinners" by Jack Haugh: "As a rule, I try not to lure readers into eternal damnation. Purely for academic interest, though, note that so-called sin stocks provide generous returns. "Over 41 years ended 2006, alcohol, tobacco and gambling shares returned about 3.5 percentage points a year more than other stocks, according to a new study slated for publication in the Journal of Financial Economics. Ironically, scrupulous investors might have created the outperformance by shunning such stocks, thereby leaving them available to other investors at bargain prices. "The study's authors, Harrison Hong of Princeton University and Marcin Kacperczyk of New York University, found that institutions like pension funds owned just 23% of the shares of their average vice company versus 28% for ordinary companies. Sin stocks were covered by an average of 1.3 analysts compared with 1.7 for other stocks. Also, sin shares were 15% to 20% cheaper based on valuation ratios. "Socially irresponsible investing offers three other perks. Vice goods and services tend to sell relatively well during economic downturns. Low share prices can make for giant dividend yields. And vice companies are likely to use conservative accounting, since their wares subject them to close regulatory scrutiny. "Choose your sin carefully, though. The risks of a deteriorating business or industry trump the allure of forbidden goods. Investors who relied on cigarettes and beer for stock performance over the past three years have likely done much better than the broad market, which has fallen by about a third. Those who took a chance on gambling stocks have done much worse, since casinos have been hampered by deep debt and a plunge in travel. Publicly traded porn has lost appeal, too. I've argued here before that Playboy Enterprises' greatest sins are poor management, an unfair voting structure and a stuck-in-the-'70s business model; Playboy magazine is today too smutty for subway readers and not smutty enough for porn buyers, according to, um, sources. Management has recently changed, but long-term challenges remain. "Also, differing definitions of "sin" can affect returns. The Vice Fund, a mutual fund loaded with alcohol and tobacco shares, outperformed the S&P 500-stock index over three years through March, but trailed it over the past year. Recent laggards include aerospace names like Boeing. Its business of building jumbo jets might not seem like the devil's work (at least to premium-class passengers), but many big aviation companies also have a hand in weapons -- sin or salvation, depending on your view. "The transgressors listed below [see graphic] offer modest valuation and generous dividends. 10/19/2008 Some more reader feedback: "Just a followup to your answer of Oct. 17 on investing in publicly traded casinos... Your reply mentioned a mutual fund, GACFX, that invests in casinos, lottery and electronic/video-game industries. There's another mutual fund that invests a significant portion of its assets in casinos/gaming. It's called the Vice Fund (VICEX) operated by Mutuals.com, and it's also a no-load fund. It splits its investments into four categories: Casinos/gaming; alcohol; tobacco; and defense/weapons. Up until this year, it had earned a 5-star rating from Morningstar and had been enjoying steady gains in its price and assets. It "had" been one of my better investments, and I hope someday it will be again." 10/18/2008 A reader inquires: "Today's QOD stated that Boyd is building Echelon Place. I thought I had read here that recently construction had been halted." It has. Today's QoD was actually written some time ago, prior to Boyd's temporary shutdown of the Echelon project. The answer has been amended to remove the outdated information.