Casinos May Not Be the Best Bet

Betting against the house is always an iffy strategy. Whether it is craps, slots or other games, the odds are in the house's favor. This is why there's an appeal to owning a piece of the house.

I was thinking about this the other day after reading they imploded one more old-time Vegas casino, the Stardust. Casino stocks have generally done well of late, as Las Vegas continues to grow as do other domestic gambling centers, like Atlantic City. Plus, the Chinese island of Macau is quickly becoming an international gambling destination. While the industry continues to expand, investors are probably wondering if now is the time to start buying pieces of the house. I looked at a number of casino stocks, and the answer generally came back with a losing hand.

The biggest of the big is Harrah's (HET - commentary - Cramer's Take), which is the world's largest casino operator. In 2005, it completed the purchase of Caesar's, and today operates casinos under such names as Harrah's, Caesar's, Bally's, Flamingo, Rio and Grand Biloxi. The company is currently the subject of being taken private at $90. A vote to approve this will be held April 5 and, assuming it is approved, observers think it may take as long as 12 months to close the deal. However, none of the guru strategies wants to bet on Harrah's.

The one most in favor is the one I base on Martin Zweig's writings, but even it is lukewarm about the stock. It likes the fact that revenue is growing even faster than earnings and that EPS growth for the current quarter surpasses the historical EPS growth rate.

But the stock has too many negatives to convince the serious player to share the table with them. For example, earnings have not been growing consistently over the past five years, and debt is high (double that of equity), higher than its industry's average. And keep in mind that the Zweig strategy likes Harrah's more than any other strategy does. This is not a strong endorsement. Given the lack of support by the guru strategies and the likelihood the company will be taken private, this is not a stock to buy at this time.

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At the time of publication, Reese held no positions in the stocks mentioned, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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