Gold Mines in Gaming

Saturday, December 3rd, 2005

By Jim Mueller

Let's face it: Humans like to gamble. It often starts with children betting that they can run faster than their buddies, but I often wonder whether it starts earlier than that. Sometimes I picture babies thinking about their parents: "I bet I can get more of that food on my face and clothes than you can get into me." They seem to win that bet, too.

As one grows older, though, it usually changes to more codified wagering such as poker, blackjack, slots, and the lottery. Occasionally, it is taken to extremes, as with the fellow who recently wagered everything he had on a single spin of the roulette wheel. Many companies support our inborn urge to bet and have made a lot of money doing so. Investors who recognize this tendency among their fellow humans and invest in companies that cater to it could do very well.

For instance, many casino companies have returns well above those of the S&P 500 since 1995. If one looks at three of the top five casino companies by market cap -- those that have been public long enough -- the 10-year annual returns have been 10.7% for Harrah's Entertainment (NYSE: HET), 20.4% for MGM Mirage (NYSE: MGM), and 23% for Station Casinos (NYSE: STN) from share price appreciation alone. Over the same period, the S&P 500 has returned 7.7% per year.

One could have invested in the support companies of the gaming industry and done very well, also. For instance, two companies that provide logistical support to the growing lottery industry, Scientific Games (Nasdaq: SGMS) and GTECH Holdings (NYSE: GTK), have risen by 25.9% and 16.2%, respectively, per year for the last 10 years. International Game Technology (NYSE: IGT), which provides slot machines among other things, has risen on average by 25.1% per year over that period.

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