RealMoney Silver - Bet With the House: Monarch Casino

Bet With the House: Monarch Casino
By John Reese
RealMoney.com Contributor
9/24/2007 8:00 AM EDT

When the economic waters turn turbulent, you do not want to gamble. That's why I suggest you think about investing in the house -- which, long term, always wins. The house in question is Monarch Casino and Resort (MCRI) .

Former Fed chairman Alan Greenspan has recently been quoted in the press as saying the likelihood of the U.S. going into a recession is slightly more than one-third. The credit markets have cooled down to a rolling simmer rather than the rollicking boil they were a few weeks ago, but it is still too early to tell if we dodged the credit-market bullet. The private-equity market, which had been boosting stock prices, has largely come to a halt.

These and other uncertainties make this a time you don't want to gamble, the very reason I'm bullish on a gambling stock: The gambling industry tends not to be as affected by the economy as other sectors. The New York Times just quoted a portfolio manager as saying that "sin" stocks tend to be insulated from swings in the economy. This makes them good investment candidates during turbulent times.

To pick stocks, I use strategies designed by some of Wall Street's best-known investors, such as Peter Lynch and David Dreman. I have automated their approaches so I can instantly analyze countless stocks by running their numbers via computer through all the strategies to see which get high grades from any particular strategy.

I just did this with the gambling industry, and, interestingly, just one company got the highest grade from any of the strategies. This does not mean that all the other gambling companies are in trouble. It probably means that many have stocks trading at their justifiable value or higher and are not worth buying at their current price level.

This is supported by a recent report in The New York Times about the Vice Fund, a mutual fund that invests in such "vices" as gambling, alcohol and tobacco. The Times reports that, according to Morningstar, this fund has returned a solid 14% or so this year. The fund's Web site reports that Lipper ranks the fund 12th out of 856 funds in the multi-cap core category.

Vices such as gambling can pay off -- provided you are an investor and not a gambler. After all, casinos can to some degree program their profitability by changing the odds on their slot machines.

The company that earns the equivalent of a straight flush from my investment strategies is Monarch Casino and Resort, which has a 1,000-room casino and resort in Reno, Nev., across the street from the town's convention center.

It has the attention of the strategy I base on William O'Neil's writings. This strategy looks for annual earnings growth above 18%. Monarch's is twice this, at 36.38%. The company has also shown consistency in its earnings, having an increase in EPS for each of the past five years. The current price level is within 7% of its 52-week high, which is good. This strategy looks for stocks on a roll, and it wants their price to be within 15% of their 52-week high.

Relative strength is a measure of a stock's performance relative to the overall market. This needs to be at least 80 for the O'Neil strategy to be happy, and Monarch rolls an ace with a relative strength of 85.

There are also 12 companies in the casino and gaming industry with a relative strength of 80 or above. This is a good hand as the strategy, wanting to make sure the company's industry is attractive, requires that at least one other company in the industry has such a relative strength.

Investors should consider stocks in top-performing industries, says the O'Neil strategy. The strategy identifies such industries by looking at the number of companies within an industry that have a weighted relative strength above 80, and choosing only the top 30% of these industries, and by looking for industries with the most stocks making new 52-week highs. Monarch's numbers would produce joyous clanging sounds from slot machines in this regard.

The strategy likes low debt, and Monarch has none. Also desired is a return on equity of at least 17%; Monarch's is a solid 21.5%.

All of these favorable variables suggest Monarch is holding a winning hand. After all, in the gambling business, the most likely winner is the house. It pays to be the house, and Monarch is -- a well-performing one, at that.