Betting On A Las Vegas Cinderella Story

| March 23, 2010 | 0 Comments

I took a few days off from analyzing the markets last week.  Instead of looking at economic data, corporate earnings, and stock charts, I crunched a different set of numbers.  I was looking at the betting lines for the first two rounds of the NCAA college basketball tournament.

No, I’m not an odds maker.  I don’t even gamble very often.  I’m just a sports fan who loves the constant excitement delivered by the first weekend of March Madness.

I love the Cinderella stories.  The upsets.  And most of all, the last minute buzzer beaters.  The raw emotion of heartbreak and triumph is shared by players and spectators alike.

And there’s no better place than a Las Vegas sports book to experience it.

I met up with a few old college friends at the Orleans Hotel and Casino. It’s located a short distance off of the Las Vegas Strip.

The Orleans isn’t the biggest, most glamorous, or most exclusive casino in Las Vegas.  It does, however, offer a clean environment, inexpensive hotel rooms, cheap cocktails, and (most importantly for us) a good-sized sports book.  And they have a bunch of areas covered in flat screen TVs to watch the games.

I’ve got to tell you, I was surprised by the number of people at the Orleans.

According to cab drivers, blackjack dealers, and even the nice lady at hotel registration, this wasn’t unusual.

In fact, they all said business is steadily improving.  And it’s really picked up over the last few months.

After taking in a few days in Las Vegas, I decided to give the casino and gaming industry a closer look.  I’m convinced casino profits will make a big comeback this year.  And the more affordable options like the Orleans could lead the way.

The good news is the Orleans is owned by a publicly traded company, Boyd Gaming (BYD).

Boyd Gaming currently owns and operates 15 casinos throughout the US. It also has a 50% ownership stake in the Borgata in Atlantic City.

The bad news is BYD faces an uphill battle.  Their unique set of risks crushed their stock price from almost $55 in July 2007 to under $3 in March 2009.  And right now their stock is trading for under $10.

However, the upside for BYD successfully managing through these problems is phenomenal.

Here’s what you need to know.

BYD earnings have dropped steadily over the last few years.  They’ve been hurt by the drop in consumer spending caused by the recession.  At the end of 2009, casinos across the board started reporting gaming revenue was stabilizing.

Now we’re seeing consumer spending rebound much faster than anticipated.  This is a good sign gambling and hotel revenue will also begin to rebound.

Right now, BYD’s stock price is being hurt by problems with three of its properties.

As I mentioned earlier, BYD owns 50% of the Borgata in Atlantic City. The MGM Mirage (MGM) owns the other half.

The New Jersey Division of Gaming Enforcement is investigating MGM’s business partner in Macau.  Apparently their business partner’s family has ties to organized crime in China.  (Organized crime and casinos?  I’m shocked.)

MGM decided the opportunities in Macau are better than Atlantic City.  So instead of fighting the investigation, they’ve decided to sell their interests in gaming properties in New Jersey.

The uncertainty around who will end up owning the other 50% ownership interest in the Borgata is hurting BYD.

The other problem involves bad timing on two acquisitions.

In 2006, BYD purchased the old Stardust Hotel on the Las Vegas Strip and another gambling hall in Florida.  That was at the peak of the real estate boom.

The Stardust Hotel was torn down and construction on a new multi-billion dollar Echelon Hotel and Casino was started.  Then the credit crunch hit…

Financing for multi-billion dollar projects disappeared.  In August 2008, BYD put their plans for Echelon on hold.  The property is now sitting idle. And plans to renovate the Florida property have also been put on hold.

As you can see, BYD is working through some serious problems.  But their problems are also priced into the stock.  If you can stomach riding a risky stock for the long haul (at least five years), we could see the stock return to its former glory.  If you buy it today, you might grab a gain of 400% to 500%.  (And that’s worth the gamble!)

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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