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Best of Liz Benston

Gaming Guru

Liz Benston

Volatile at best, stocks in sector take a wild ride

6 October 2008

LAS VEGAS, Nevada -- If stock market investing involves skill and insight, like playing poker, investing in gaming stocks is an exception, more like betting on black at roulette.

Only a few investment firms have consistently invested in the gaming industry. The majority are short-term investors, profiting less on long-term business strategies than the news of the day, as well as rumor, emotion and fear.

"The stocks in this industry have always been way more volatile than the business warranted," said Larry Haverty, a porfolio manager with GAMCO Investors.

After the stock market crash of 1987, the market value of then-Caesars Palace owner Caesars World plummeted to about twice the value of a parking garage the company had just built. During the national recession in 1991, Harrah's Entertainment's market value fell to an abysmal 1 1/2 times the company's earnings.

Gaming stocks are a more pitiful sight today, given the industry's tremendous earnings growth as recently as a couple of years ago. Boyd Gaming and MGM Mirage, for example, have a market value that's a fraction of the worth of a handful of their many casinos.

Casino stocks were one of the last consumer sectors to be punished by the economic slowdown. That's little consolation now, as they have been pounded just as badly, if not worse, than stocks in other industries that depend on discretionary dollars.

Besides the tourism-specific problems — the decline in travel, high airfares and flight cutbacks — global concerns, such as the price of oil, are weighing on casino stocks.

Historically, gaming stocks have taken a hit when concerns arise about the availability and price of energy, such as during the Persian Gulf War, Haverty said.

Yet why all of the piling on now? In spite of the downturn, it's a business that still generates huge revenues and its earnings have fallen much less than those of other sectors.

Last week, as Congress considered a $700 billion bailout of the investment banking system, offers some insight.

Gaming stocks plummeted dramatically last Monday, as the House of Representatives rejected the bailout plan. Shares of Las Vegas Sands fell more than 13 percent that day and are now trading at 20 percent of their value a year ago. MGM Mirage shares also lost more than 13 percent of their value, down about 75 percent from a year ago. Wynn Resorts shares fell by more than 8 percent and now trade at just over half their value of a year ago.

Those declines were deeper than those of most consumer stocks. Fears about the availability of capital have a bigger effect on an industry that's more leveraged than most and heavily dependent on banks to finance the billions in building that has driven its growth since its emergence on the stock market in the mid 1980s.

Some gaming companies are seeking money for projects today and they will in the next few years have to refinance their debt to meet profit expectations.

With so many unknowns, the pressure to sell casino stocks is proving too much, Haverty said.

"At a time when you have questions about where companies are going to get money, investors are saying, 'Just get this out of my sight,'?" he said. "There are no rewards for clear thinking right now."

Joe Fath, a portfiolio manager for T. Rowe Price & Associates, said investors are punishing "every company that has a growth pipeline."

Some investors are not giving companies credit for future projects, removing them from earnings projections and further depressing stocks.

Moreover, a ban on short selling is unintentionally depressing gaming stocks, which aren't covered by the ban, Fath said.

The Securities and Exchange Commission has prevented investors from profiting from the stock price declines of hundreds of financial companies. Zealous short sellers are looking for other places they can bet on stock price declines, including gaming, Fath said.

Haverty and Fath still own gaming stocks and believe the companies are positioned to rebound with the economy.

For now, "the market is completely dysfunctional," Fath said. "It's not a fun ride."