Sex, Gambling Stocks Trading on the Cheap

Sex and gambling stocks are trading at attractive values for those with open minds.
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BOSTON (TheStreet) -- Sex and gambling are America's two seediest industries. This being the U.S., there are stocks for those.

With the stock market at a 16-month high, it's becoming difficult to find undervalued investments. The following two stocks are thinly traded, but extremely cheap. Analysts forecast unholy returns.

Full House Resorts

(FLL) - Get Report

owns and invests in gaming properties. It operates the FireKeepers Casino in Michigan and the Harrington Raceway & Casino in Delaware. During the past three years, it has increased net income 95% annually, on average.

Quarter

: Fourth-quarter profit totaled $1 million, or 6 cents a share, from $10,000, or break-even, a year-earlier. Revenue nearly tripled. The operating margin turned positive and hit 42%. Full House has $9.2 million of cash and $1.5 million of debt.

Stock

: Full House has risen 41% during the past year, more than the

S&P 500 Index

. It trades at a price-to-projected-earnings ratio of 9.9 and a price-to-cash-flow ratio of 4.9, 69% and 65% discounts to peer averages. It's also cheap based on book value.

Consensus

: Only two analysts cover Full House, both rating it "buy."

Morgan Joseph

expects the stock to soar 72% to $5.25 and

Sterne Agee

believes it will rise 34% to $4.10.

TheStreet's

stock model, which rates the shares "buy," expects them to climb to $4.16.

Holders

: During the fourth quarter, 10 of Full House's 15 largest shareholders, including several insiders, purchased more stock. Four retained the size of their bets and one decreased its holdings.

TheStreet

clocks institutional ownership at 31%.

Thesis

: Full House's profit margins, with an 83% gross and a 16% net spread, trump those of larger peers such as

Las Vegas Sands

(LVS) - Get Report

and

MGM Mirage

(MGM) - Get Report

. Furthermore, its stock is cheaper and its balance sheet, with a $7.7 million net cash tilt, is safer.

Rick's Cabaret

(RICK) - Get Report

calls itself the "premier operator of upscale gentlemen's clubs." The company owns strip clubs, personal Web sites and an online auction site for adult paraphernalia. According to the company's Web site, "Anna Nicole Smith met her oil-billionaire husband while dancing at Rick's Cabaret, and many of our performers have become Penthouse Pets and Playboy Playmates." During the past three years, Rick's has boosted revenue 45% annually, on average, despite the recession.

Quarter

: First-quarter net income declined 2% to $780,000, and earnings per share fell 18% to 9 cents. Revenue increased 17%. The operating margin slimmed from 14% to 12%. The balance sheet holds $10 million of cash and $40 million of debt.

Stock

: Rick's has more than doubled during the past year, outperforming stock-market benchmarks. It sells for a price-to-projected-earnings ratio of 9.8 and a price-to-book ratio of 1.4, 70% and 79% discounts to leisure industry averages.

Consensus

: Of the four researchers following Rick's, all advocate purchasing its shares.

Rodman & Renshaw

(RODM) - Get Report

offers a price target of $22, leaving a potential 84% return.

Sidoti & Co.

predicts that the shares will rise 51% to $18.

Holders

: During the fourth quarter, 10 of Rick's 15 largest shareholders, including quantitative hedge fund

Renaissance Technologies

and

Deutsche Bank

(DB) - Get Report

, purchased more stock. Four retained the size of their bets and one decreased its holdings.

Thesis

: Rick's is avoided by plenty of investors because it's difficult, and in some cases, uncomfortable to justify an investment in the world of adult entertainment. But its stock is extremely cheap and its growth rates are impressive.

-- Reported by Jake Lynch in Boston.