How to Play the Las Vegas Comeback

by Michael Lombardi, CFP

According to the Nevada Gaming Control Board, gambling revenue in Vegas fell 11% in 2008 from 2007, the biggest annual drop since the Board starting keeping track of gambling revenue. In 2009, it has only gotten worse. Gambling revenues fell 15% on the Strip in January and 23% in February.

As business has come down in Vegas, hotels and resorts that accumulated too much debt as they expanded on the Strip are in trouble. At one point, it was fashionable to have a vacation condo or home in Vegas. Today, the real estate market there is in shambles.

So, how does an investor take advantage of the troubles in Las
Vegas? Two different plays here: real estate and stocks.

House and condo prices in the newer developments are selling at 50% below what they sold for in 2005. If you are a real estate investor, there is good opportunity here. If you love the Vegas lifestyle and are looking for a vacation home, Vegas and Miami offer the best deals. (Vegas is a bit too dry for me; no ocean!)

For stock market investors, there are plenty of “plays” available. MGM Mirage is the biggest casino operator in Vegas. Harrah’s Entertainment, Inc. is the biggest casino company in the world. There have been rumors of bankruptcies for both these companies (so I will not be buying their stocks.) But short sellers have done and will continue to do well with both.

The money will be made by investing in the stocks of the companies that have the money to buy companies like MGM Mirage, Harrah’s and others at bargain prices. Stephen Wynn’s Wynn Resorts (NASDAQ/WYNN) has some cash in the bank, but not enough to make a big acquisition. Penn National Gaming, Inc. (NASDAQ/PENN) is a low-key operator with over $1.0 billion in the bank that has been looking at buying troubled Vegas casino companies. I see Penn National as a bargain hunter.

In this area, look for companies with lots of cash on their balance sheets, as these are the companies that will be acquiring other companies at what are now bargain prices.

Michael’s Personal Notes:

Consumer and investor sentiment is flattening out. Most people I talk to feel better about the economy; most feel the damage has been done, the worst is behind us. I disagree. Yes, the Obama Administration and Ben Bernanke have done a masterful job in “opening the gates of cash.” But nothing comes for free. There will be a price to pay for the government’s $12.0-trillion in bailout guarantees, payouts, backstopping and promises. Will it be higher inflation or higher interest rates? Maybe both.

Where the Market Stands:

The Dow Jones Industrial Average is now down nine percent for 2009. The bear market rally we have all been following seems to have stalled, but I believe the rally has another leg to go. The tech-heavy NASDAQ is the only major index up this year, up four percent. What would happen to investor and consumer confidence if the Dow Jones turned positive for the year? Stock prices would move even higher, as people re-entered the market. However, at 31 times earnings, the large-cap Dow Jones stocks are hardly a bargain. The bear is well aware of that fact.

What He Said:

“If I had to pick one stock exchange that would rank as the best
performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top performing stock markets in 2007, up just under 20% for the year.