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Stockpickr: Win Big With Top 5 Poker Stocks

James Altucher

Last week, Stephen Dubner at the Freakonomics blog had an excellent post about the debate over whether poker should be considered a game of skill or chance.

This discussion is important not only for the sake of poker players who want to justify the enormous amount of time spent studying and playing the game but also because of the SAFE Port Act passed in October of last year that forbids U.S. players from participating in online gambling sites. The law specifically states that games "predominantly subject to chance" are affected, and poker is included under that umbrella.

The Freakonomics post is worth reading, especially for one question that I had not heard before: Is it possible to intentionally lose a poker game? If the answer is yes, then it's more likely that poker is a game of skill.

So what does this all mean for investors?

Well, if poker is a game of skill and can somehow avoid falling under the jurisdiction of the SAFE Port Act, then several stocks will be enormously effected. Toward this end, U.S. Rep. Barney Frank (D., Mass.) recently introduced a bill that would allow Americans to play online again, calling Internet gambling a "victimless crime."

We've set up the Freakonomics Poker Stocks portfolio at Stockpickr, which contains five stocks that would be most affected on the long side and three stocks on the short side that might get hurt if poker sites were made legal again for U.S. players.

For instance, Cryptologic(CRYP) is one name that would benefit considerably, because it makes the software that fuels many of the online poker sites out there. Cryptologic has an excellent balance sheet, equipped to handle any slowdown with $126 million in cash in the bank and no debt.

With a market cap of about $405 million, that leaves the company with an enterprise value of just $283 million. The company had cash flows of $40 million over the past 12 months, giving it an enterprise value to cash flow multiple of just 7, making it an excellent takeover target at these levels if you think the legislation will be repealed.

Even without such a repeal, analysts from ThinkEquity expect Cryptologic to earn $1.30 per share on revenue of $90 million in 2007, down from their earlier estimate of $125 million in revenue and $2.08 a share. That's a harsh blow, but it's not a knockout punch as many had initially expected.

Two great Stockpickr portfolios also contain Cryptologic.

First, I've written about super-investor Mohnish Pabrai several times. I profiled and interviewed him for my book, Trade Like Warren Buffett, and I've also written about him as a potential successor to Warren Buffett. He's a deep value investor with about $500 million in assets and a tendency to like small-cap stocks that are trading well below their intrinsic value.

Go to Stockpickr to see the rest of his portfolio, including steel company Ipsco(IPS) and regional airline company Pinnacle Airlines(PNCL).

Second, take a look at the Dogs of the Magic Formula portfolio on Stockpickr. These are stocks that have had the worst 52-week returns of all the names that satisfy the formula described in Joel Greenblatt's book The Little Book That Beats the Market. These are stocks with high return on capital (great companies) that are trading at low multiples over earnings (cheap companies).

Two other stocks on this list of 10 include biotech company Biovail(BVF) and digital-camera chipmaker OmniVision Technologies(OVTI).

For more, including analysis, on the other stocks affected by any changes in the current online gambling law, check out the Freakonomics: Poker Stocks portfolio. Of particular interest is an old favorite of mine, Optimal Group(OPMR). And some casinos, including MGM Mirage(MGM), are on the "hate list" of this portfolio.

On a related note, Steven Levitt, co-author of Freakonomics with Dubner, is also a big fan of horse racing. In this post made last week on the Freakonomics blog, he placed his bets on the Kentucky Derby.

In honor of the Derby, we've set up this index at Stockpickr of offbeat stocks in the horse-racing business, including online horse-wagering stocks such as Youbet.com(UBET) and Magna Entertainment(MECA).

Also, if you haven't checked it out yet, please try out our newest feature, Stockpickr Answers. You can ask questions and answer them, and you can see who the "top analysts" are and check out Jim Cramer's latest answers.