This column was originally published on RealMoney on March 19 at 8:55 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
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
( HET), 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 faster than sales 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.
operates casinos under the names Mandalay Bay, Luxor, Excalibur, MGM Grand and New York, New York, among others. MGM's karma favorably impresses one guru strategy, the O'Neil-based one, though it does not give MGM its highest grade. One thing the strategy likes is MGM's annual earnings growth. This needs to be above 18%, but above 25% is preferable. MGM's annual earnings growth rate over the past five years has been 33.53%.
Also, EPS has increased in four of the last five years, which is acceptable. The stock's current price level must be within 15% of its 52-week high. In this case, it's within 11%. Further, the stock's relative strength is a very strong 91. (Unlike RSI, O'Neil's relative strength measures a stock's price performance compared to all other stocks over the past year, meaning that MGM's price has increased more than 91% of all other companies in the U.S. stock market.) The one test MGM fails is that debt relative to equity keeps increasing (the strategy wants this to decline). The O'Neil strategy is willing to place a bet on MGM, but not bet the ranch.
, the company headed by legendary casino operator Steve Wynn and whose properties includes the Wynn and Wynn Macau casinos, gets low to very low grades from all the guru strategies. Take a pass on this one.
owns or manages 19 casino properties in six states, including the now-gone Stardust. The only strategy that thinks its dice are rolling favorably is my Peter Lynch-based strategy, and even it doesn't give the stock a passing grade.
The Lynch strategy likes the 24.83 P/E and the 34.19% growth rate (based on the average of the three-, four- and five-year historical EPS growth rates). This produces a P/E/G ratio (P/E relative to growth) of 0.73, which is perfectly adequate (1.0 or less is acceptable). One thing the strategy doesn't like is the amount of debt the company has, which is far higher than the strategy accepts. Buying this stock is a crapshoot.
Penn National Gaming
is the nation's fourth-largest casino operator and is a major owner of racetracks with slot machines. Like MGM, Penn gets a decent grade from the O'Neil strategy. It includes such favorable cards as EPS earnings growth over the past five years of 45.82%; earnings that would qualify as a straight: five consecutive years of ascending numbers; and a current stock price within 10% of its 52-week high. But its relative strength is relatively weak at 66. Don't double-down on this one.
These are five major casino operators. None hold a great hand, though MGM and Penn have enough good cards to keep one in the game. The industry overall is not dealing good hands to investors, but these two stocks could interest those who like to gamble.
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
, an investment research firm, and
, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book,
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback.
to send him an email.
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.