Casinos Are on a Roll

Increased diversity of revenue streams and larger market caps of gaming companies also have drawn in institutions, which realize there's more to gaming than Las Vegas. The slow spread of gaming is likely to continue, with the Lac Vieux tribe settling a lawsuit with two Detroit casinos last week, paving the way for Detroit to have permanent casinos in place when it hosts the Super Bowl in 2006.

Elsewhere, Pennsylvania is debating a number of proposals to introduce slot machines at racetracks, called "racinos," with Ohio and other states following suit. "States need revenue, and I'm of the mind that the expansion of gaming is a way to get into that," said Hausler.

Furthermore, the Department of Justice has filed an appeal with the Supreme Court surrounding the legality of Class II gaming devices, such as bingo machines, on Native American land. If the courts rule that the bingo machines are legal, game-machine makers like IGT (IGT Quote - Cramer on IGT - Stock Picks) could see even larger growth in a few years. J.P. Morgan estimates that the potential market for such devices could reach 100,000 by 2006.

But the biggest near-term growth catalyst for the gaming industry could come from overseas, with the U.K. re-examining its regulation on the gaming industry. Recently, the Queen of England put gaming on her official agenda for 2004.

"We believe [the queen's] announcement is a positive step for deregulated gaming in the U.K. and could set the stage for new legislation in 2004," said Harry Curtis, gaming analyst at J.P. Morgan. "This is good news for the American gaming companies, like MGM Mirage (MGG Quote - Cramer on MGG - Stock Picks), Harrah's Entertainment (HET Quote - Cramer on HET - Stock Picks) and Isle of Capri Casinos (ISLE Quote - Cramer on ISLE - Stock Picks), who, over the past few months, have been aggressively entering the U.K. gaming market."

Stocks That Pay You Back

Another catalyst behind the move in gaming stocks and increased institutional interest is that many of these companies have begun offering dividends. Many institutions and funds can't invest in companies that don't.

"Gaming stocks generate a lot of free cash flow, but until they changed the laws around dividends, these companies didn't pay them," said Hausler. "The introduction of dividends makes these stocks more compelling. There have been more growth and income funds coming in."