Gaming the Casino Stocks

Casino stocks got beaten up badly in the market crash, falling victim to a perfect storm of negative fundamentals. First, financing for expansion dried up, raising the specter of defaults on multibillion-dollar projects. Second, common folk lost their jobs and had less "fun money" to spend on vacations in general and gambling in particular.

Dismal hedge-fund performance also undermined the casino industry, because its well-greased investors dominate the list of high rollers that casinos depended on for a good chunk of their annual profits. Even worse, both small fry and big fish in the gambling pool might change their habits permanently, now that we're far less wealthy than we were just a year ago.

Sector stocks began to move higher with the broad market in March, with many issues rising into and mounting their 200-day moving averages near the end of April. Rallies then stalled at these critical levels and gave way to sideways patterns that have been digesting the outsized gains that were posted in the strong recovery effort.

The two-month correction has been broad and deep throughout the sector, with many components dropping to multiweek lows. The good news is that this retrenchment appears to be nearing its end, with the odds favoring a long-overdue bounce in the third quarter. With this in mind, let's look at top prospects in the casino and gambling support industries.

First, let me offer a note of caution about trading these stocks. Top Las Vegas operations lagged regional casinos and slot companies during the recovery rally. As a result, nearly all mega-resorts still trade well under their 200-day moving averages. For this reason, I'd avoid Wynn Resorts(WYNN Quote), Las Vegas Sands(LVS Quote) and MGM Mirage(MGM Quote) when picking your sector exposure.