Gaming stocks down on their luck

I don’t go to Las Vegas very often. But I’m always amazed at the over-the-top glitz and glamour of The Strip.

My jaw just drops when I walk through the Bellagio lobby adorned with hundreds of pieces of Dale Chihuly glassware or when I look up at the ornate, gold-gilded fresco ceiling at the Venetian.

I always remind myself, however, that all those amazing casinos were not built from the money of winners. They were paid for by money that casinos raked in from all the losers!

I’m always amazed at the over-the-top glitz and glamour of The Strip. But I have to remind myself who paid for it all.

Bellagio, Venetian, Wynn, New York New York, MGM Grand, Paris, Bally’s, Treasure Island, Caesar’s Palace — all of them were built from the billions of dollars gamblers dropped on the slots, craps, and blackjack tables.

That’s the reason investing in casino stocks has paid off so well over the years.

But not lately …

Gaming Stocks Have
Gotten Hammered!

Many are down more than 50% from their highs.

Las Vegas Sands (NYSE: LVS), operator of the luxurious Venetian casinos in Las Vegas and Macau, has gotten bloodied the worst — plunging from $144 to only $6.

Talk about a brutal beating!

The reason LVS has gotten clobbered so badly: its aggressive Asian expansion plans. It spent $2.3 billion on the Macau Venetian and will spend another $4.5 billion on its new Singapore casino.

Since casinos have been so profitable in the past and with stock prices so low, I am now starting to hear a lot of bottom-fishing talk about this being the time to jump back in.

To those of you thinking about climbing aboard the casino bandwagon …

Here Are Two Reasons to Re-Consider
Jumping Into Gaming Stocks Right Now …

Reason #1 —
Macau Slumping Like Las Vegas

China recently changed its travel restriction to Macau from one trip every two months to one trip every three months. It turns out that China’s citizens were losing too much money at the Macau casinos … creating too much social strain.

That move resulted in a 10% drop in gaming revenues for the third quarter of 2008.

And the slowdown is so severe that LVS halted construction there in November to conserve cash.

There’s more bad news … Now, the Chinese government wants Macau to de-emphasize its casino culture into a more diversified economy.

China’s vice president, Xi Jinping, said, “We should leave room for adequate diversification and properly handle the relationship between development and conservation.”

Business has slowed so much that Melco Crown Entertainment asked its Crown Macau staff to accept an 8% pay cut. And that’s after agreeing to a shorter working week and unpaid leave!

Reason #2 —
More Capacity Around The Corner

Adding to the strains facing Asian casinos is an increase in planned projects …

The Taiwanese parliament just voted to legalize gambling in hopes of boosting the economy and attracting tourists. These new casinos will be built on a group of beautiful islands of Penghu, which lies in the Taiwan Strait between Taiwan and the east coast of China.

LVS will be opening the first casino in Singapore towards the end of this year. The Marina Bay Sands, a 2,600-room hotel and casino, even features an indoor canal and ice skating rink.

And with Taiwan’s new legislation, you can bet your bottom dollar that LVS is going to have a lot of competition.

If you have a little ‘mad’ money and think casino stocks have bottomed, a cheap call option could turn into a winning hand.

Casino stocks do look cheap. But they’re cheap for a darn good reason. And that reason is that profits are disappearing as cash-strapped Americans and Asians have dramatically cut back on their gambling junkets.

I wouldn’t recommend any casino stock now. But if you think I’m wrong, and you’re willing to roll the dice, you may want to look at some cheap, long-term call options (also known as LEAPs).

Wynn Resorts, for example, is currently trading in the mid-$30′s. So if you bought 100 shares, you’d have to shell out about $3,500. You could, however, buy a January 2010 option with a strike price of $40 for less than $400.

If Wynn Resorts rallies between now and January of next year, these options could easily double, triple, or quadruple your money! You could turn a couple hundred dollars into several thousand in a few months.

Of course, options aren’t for everyone and involve more risk than simply buying the stock outright. But if you have a little ‘mad’ money and think casino stocks have bottomed, a cheap call option could turn into a winning hand for you.

Best wishes,

Tony

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