Place Your Bets on Online Gaming

NEW YORK (TheStreet) -- Gaming stocks have been hot in 2013 thanks in large part to the boom in gambling by mainland Chinese in Macau. The Market Vectors Gaming ETF (BJK)BJK is up 39%, well ahead of the S&P 500's 27% year-to-date gain. A new catalyst for the group and BJK could be newly legalized online gambling in New Jersey.

According to a report published at Seeking Alpha, most of the larger casino companies including Boyd Gaming (BYD)BYD, MGM Resorts International (MGM)MGM and Caesars Entertainment (CZP)CZP all have online gaming divisions and stand to benefit from legalization in New Jersey and likely other states in the future. Only three states allow online gaming.

A report from Morgan Stanley (MS)MS cited in that same article estimates that revenue from online gaming in 2014 could be $670 million, growing to possibly $9.3 billion by 2020.

The Market Vectors Gaming ETF, of course, captures the space and should benefit from online growth. It is a global fund with the U.S. having the largest country weighting at 29%, followed by China at 25% and the UK at 14%.

BJK has 46 holdings, the largest of which are Sands China and Las Vegas Sands (LVS)LVS, both with slightly more than 8% weightings.

Slot machine leader IGT (IGT)IGT, which has a 2.6% weighting in BJK, recently purchased Double Down Interactive so it can capitalize on online trends.

Clearly the industry is optimistic for online's prospects. On the negative side of the ledger, USA Today had a lengthy editorial calling for the U.S. Congress to shut online gambling down for social and ethical reasons.

People clearly love to gamble  -- and where there is gambling, online or otherwise, there are losses and where there are losses there are big losses that do serious financial damage to people who cannot afford their losses.

There is no refuting that argument. Regardless of your beliefs, anyone who believes online gambling should be made available has to concede that there are people who are addicted to the action and do themselves in because of their addiction.

Of course, the casinos support Gamblers Anonymous and similar support groups much the same way tobacco companies post warnings about the dangers of smoking. But just as people still get lung cancer, other people will continue to be hurt by their gambling habits.

Increased online gaming raises a question about whether fewer people will go to casinos if they can click their bets from the couch. This argument likely comes up short as there is no replacing bachelor parties, conventions and other events that make Atlantic City and Las Vegas wildly popular destinations. If anything, this allows people who may not be able to travel so easily the chance to gamble.

Gaming stocks, and by extension BJK, are part of the consumer discretionary sector. The nature of the discretionary sector is that it tends to go down more than the broad market during the bear phase of the cycle and up more than the broad market during the bull phase of the cycle.

During the bear market of 2008-2009 BJK was down 68% from its peak versus 56% for the S&P 500. On the way back up from the March 2009 low, BJK is up 242% well ahead of the 138% for the S&P, according to Google Finance.

The performance of this group over the long term has been outstanding and the online potential opens up an entire new source of revenue and profits. There is no overcoming the ethical drawbacks of addiction and threat of financial ruin for people who cannot control their gambling other than to just simply decide to invest in the group or not.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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