In the gaming industry, the hindsight answer this year is not to. Or to short the industry as stocks in all gaming sectors have fallen hard and fast and to depths few imagined just weeks and months ago.
There has been no safe haven. Not in big cap casinos. Not in regional casinos. Not in suppliers. Not in publicly traded debt. Not in companies focused on Macau.
For a long time, we have thought that regional casino companies were the best bet. Their stock prices had been beaten down to classic “cigar butt” value levels thanks to all the woes we know about-smoking bans, new competition, gas and goods prices, weakening economy.
But in a market like this, value does not matter to enough investors. They sell the stock on bad news. They sell into infrequent rallies. They sell on good stock-specific news if the macro news is bearish, as it increasingly is.
Regional stocks still look like great buys. The companies are cash flow-positive, which protects the business.
And their low prices appear to make them bargains, unless, of course, you think their growth projects will prove to be drains, not contributors, as some bears believe.
The cheapest of them has been Boyd. Look at these numbers at the time of this writing: forward price-earnings ratio of 5.9, price-to-book 0.61, price-to-sales 0.42, price-to-earnings-growth 0.53. And the company pays a dividend yielding nearly 7 percent.
Plus, Boyd is in strong hands, with the founding family confidently in control.
The worries about Boyd, over and above those generally against regional and Las Vegas casino operators today, are that it will go cash-flow negative as it builds its Echelon mega resort in Las Vegas, and that Echelon, rather than add to earnings, will lose money.
We have fewer worries. Boyd will be cash flow-negative only as it lays out money to build Echelon.
And the project itself will be the first new mega resort built by a company that has an existing database of millions of customers throughout the United States eager to visit Las Vegas, or who visit now but stay at the hotels of competing companies.
Indeed, Boyd has the second-largest player database after Harrah’s, and will have far fewer Las Vegas Strip rooms to fill.
The joint venture with Morgans Hotel Group will help too as MHGC can fill its Delano and Mondrian hotels at Echelon with its own customers.
But Boyd aside, strong arguments can be made for other regional stocks that, while not as cheap, are inexpensive-Ameristar, Pinnacle and Isle of Capri come to mind.
Still, at a time of such deep negative sentiment, it is difficult to buy.
So where does one look? One answer might be to the voters of Colorado and Missouri.
Residents of both states appear likely to pass referendums in November that would benefit casinos.
Coloradans may lift the $5 bet limit and allow 24-hour casino operations.
Missourians might repeal the $500 loss limit.
Raising the bet limit will be especially helpful to three publicly traded companies-Century Casinos, Ameristar and Isle of Capri.
Century would benefit because Colorado is by far its largest market. And with a market value of just $70 million, a big increase in Colorado business can move the needle, as they say.
Ameristar is developing a destination resort-quality property in Black Hawk with four-star hotel and spa.
When the company announced its plans, skeptics questioned such a big investment in a $5 bet limit market. ASCA executives said the investment is justified, noting that a $5 slot bettor is a valuable player.
Now, if the bet limit goes to $100, Ameristar will be sitting pretty as it can market to more table games players and affluent customers and will be the only resort-quality casino in Colorado.
Isle would benefit because Isle of Capri-Black Hawk is a large enough property to have a significant impact on the overall company.
In Missouri, the repeal of the loss limit would allow casinos to market to high rollers for the first time.
That would help Penn National in Kansas City and Isle in Booneville, among the publicly traded companies. And Harrah’s and Herbst, privately owned but with publicly traded debt, also would benefit.
But the big winners would be the two companies that have pushed hardest for the loss limit repeal, Ameristar and Pinnacle.
Ameristar benefits by having two casinos in the state, with its St. Charles property especially positioned to market to high-value players by virtue of both its recently expanded and upgraded
destination-quality property and its location in the under-penetrated St. Louis market.
Pinnacle especially benefits because it also has built an upscale property in downtown St. Louis at Lumiere Place, plus it is opening a suburban St. Louis casino next year.
Analysts have put the value of loss limit repeal at $1 to $3 a share for ASCA and PNK.
Of course, betting on referendum results is no sure thing. Gaming proposals have a history of polling like winners in the summer and turning into losers in November.
And further stock market declines, new smoking bans or company missteps could overwhelm the effects of these referendums even if they pass.
But it seems reasonable to think that the bear has just about run his course in companies whose stocks have fallen 70 percent and more.
At some point, the odds favor the upside in the stocks of otherwise solid companies.
Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll free: 1-866-683-4357 or online at www.gaminginvestments.com.