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Fund Dumps U.S. Casino Stocks, Buys in Asia

BOSTON ( TheStreet) -- Rising prices at gas pumps have put the brakes on a rally in casino stocks, including Las Vegas Sands (LVS - Get Report) and MGM Resorts (MGM - Get Report).

Jeff Middleswart, manager of the Dallas-based Vice Fund (VICEX), says investors shouldn't be enticed to buy at these lower prices. The fund is known for buying so-called sin stocks such as tobacco, alcohol, gaming and defense.

The four industries tend to thrive regardless of how the economy is performing, Middleswart says. In the recent stock-market turmoil caused by uprisings in the Middle East and the earthquake off Japan, the Vice Fund has shielded investors more than its rivals have. The fund has fallen 2.1% in the past month, compared with 5.8% for the S&P 500. As stocks rebounded last year, the Vice Fund also outperformed the benchmark index.

In addition, those sectors have historically produced high cash flow and dividends, making the Vice Fund attractive to investors who want long-term defensive growth. For that reason, the Vice Fund has a concentrated portfolio of about 30 equities.

Middleswart says the portfolio emphasizes dividend-paying companies with positive cash flow and adequate debt-service coverage, while it avoids those with red flags in financials, burdensome pension obligations and recurring write-offs. The debt issue is a key reason he says he's shying away from domestic casino names, but Middleswart is also concerned about the rising fuel costs for individuals in the U.S.

With political unrest in the Middle East sparking violent protests in oil-exporting countries like Libya, the price of crude oil has surged above $100 a barrel. Experts predicted that gasoline prices will hit $4 a gallon in the U.S. this summer; a 15% spike in gas prices already this year may mean $4 gas sooner rather than later. The impact of higher gas prices in the U.S. is expected to curb consumer spending, putting the economic recovery in jeopardy.

For many, gaming is the epitome of discretionary spending, and the impact of higher gas prices will surely be felt on related companies as gamblers put more quarters in the pump than the slot machine.

"That's definitely a part of it and it feeds into the concept of feeder markets and people having to travel, like, from Ohio to Indiana," Middleswart says. "As you have higher gas prices, that makes the long trip even more unlikely to happen."

For that reason, the Vice Fund owns no U.S. casino stocks. Instead, some of the fund's top holdings lean toward tobacco makers like Philip Morris International (PM) and Altria (MO), and defense stocks such as General Dynamics (GD) and Raytheon (RTN). Philip Morris alone accounted for more than 12% of the fund's $73 million assets as of Dec. 31.

That's not to say there aren't attractive opportunities in gaming-related stocks. Middleswart breaks down the gaming sector into four groups and gave TheStreet his view on each as well as potential investment ideas for those looking to increase exposure to the sector. Each group, from domestic and Asian casino operators to gaming-equipment companies and race-track owners, are detailed on the following pages.
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CHDN $128.04 0.48%
IGT $17.39 -1.00%
LVS $45.13 1.50%
MGM $22.18 1.40%
PENN $15.96 0.00%


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