You’ve got to know when (not) to hold ’em

Benj Gallander and Ben Stadelmann
Thursday, August 30, 2007

If you like to gamble

I tell you I’m your man
You win some, lose some
It’s all the same to me
The pleasure is to play
Makes no difference what you say

–“The Ace of Spades,” by heavy metal group Motorhead

The way politicians are shifting their stance on gambling from vice to virtue, it’s easy to think that someone with tastier breath and more teeth spoke these words.

Take Toronto mayor David Miller and some city councillors, who announced in July that they’d like the city to get its first full commercial casino (apparently the TSX doesn’t count). The idea is to generate badly needed revenue to mitigate an estimated $575 million budget shortfall next year. Only the provincial politicos can grant the licence, and they have so far have nixed any new competition for the existing five charity and four full casinos.

Regardless, it’s clear that government has succumbed to the allure of revenues reaped from citizens hunkered down at gaming devices and tables. As for any accompanying social costs? Later, dude, later.

This set us to wondering just how well the casino industry is faring these days — specifically, those companies that trade publicly. After all, it’s not the government that finances, builds and operates these joints. it’s the business partners that do the heavy lifting, while sending the government its cut.

A number of years ago, some US gambling large-caps sat on our Stock Watch List, although none lured a Contra gambit. Today, there aren’t any that are far enough out of favour to meet our criteria. Last week, the sector rallied after Dubai World committed to a $5 billion casino deal, including a 9.5 percent investment stake in MGM Mirage.

MGM’s shares have soared more than two and a half times this year. Las Vegas Sands shares have bounced around, but the stock is back near its 52-week high. Last year, it won the contract to build a casino in Singapore after a 40-year ban was lifted. This week, the company opened the world’s largest casino in Macau, China. The market is applauding growth through exposure to foreign locales that have a taste for gambling.

Harrah’s Entertainment has steadily risen by one and a half times this year and is sitting just off its high. It operates more facilities, including Casino Windsor, than anyone else in the world. An investment made in Wynn Resorts about five years ago would be worth almost ten times as much.

But every litter has its runt, and Trump Entertainment owned by “the Donald.” has delighted many by crapping out, the stock price about one-fifth of its top of the past 52 weeks. For many contrarians, this stock might actually be worth following, but it does not have enough spangled stars to meet our criteria.

In Canada, the operators are smaller and hold slim appeal to us. Great Canadian Gaming operates 11 casinos and some racetracks. The company is making improvements by overhauling operations and cost cutting, but the shares got hit recently from the market pullback and the stock will have to more than double to revisit the all-time high set in 2005.

At Contra the Heard, we did do well with our investment in Clairvest due to its piece of Gateway Casinos Income Fund. It received an offer to acquire all of the units of the fund at a premium.

Conventional investing wisdom says that the casino industry does well during a recession. During the period from March to December of 2001, the S&P was down four percent, the Nasdaq more than eight percent, while the casino stocks climbed by 27 percent.

With the subprime mortgage fiasco afoot, hedge fund blow-ups, and other global dangers, the odds are reasonable that the dreaded “R” will occur in the near future. Some investors may look to casinos as a “safe” haven in bad times, but you won’t catch us rolling the dice in this direction.