5 Casino Stocks The Smart Money is Betting On

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After identifying the most popular stocks among hedge funds (see our entire Top 10 list here) according to their third quarter 13F filings, we have decided to break down the top five stocks that hedge funds love in the casino industry. The top casino stocks should perform well over the interim as a strengthening in the global economy drives increased discretionary spending and corporate travel. Our list includes the hundreds of hedge funds and prominent investors that are required by the SEC to disclose their public equity holdings quarterly. In descending order, we have outlined the most-loved casino stocks based on the aggregate number of funds owning each.

Penn National Gaming (NASDAQ: PENN) came in as the fifth most popular casino stock loved by hedge funds with 22 filers. Penn is up almost 30% year to date following its announcement to split the company into two parts. The proposed REIT conversion sets Penn apart from major competitors and will be the first ever casino REIT. Penn does not currently pay a dividend, but following the split, the majority of Penn's properties will be placed in a REIT and operations will be managed by another publicly traded company. Deutsche Bank puts a sum-of-the-parts valuation on the gaming company at $65 - compared to its $50 current trading price. Penn's 23x trailing P/E compared to its forward P/E of 17x suggests that investors still might be overlooking the casino's future potential.

MGM Resorts International (NYSE: MGM) had 23 filers owning the company at the end of 3Q to come in fourth. MGM derives the majority of its revenue from its Las Vegas properties - accounting for 60% of revenue in 2011. Revenues are expected to be up 17% in 2012, helped by the first full year of its China operations.  MGM has also undertaken initiatives to remodel several of its MGM Grand and Bellagio rooms, which should help drive higher visitations in the interim. MGM is expected to post negative full year earnings for at least the next two years while reaching just a 6% annual five-year earnings growth. With the casino stock down 5% year to date and plans for a turnaround effort - not to mention expansion prospects for Macau - hedge funds might be betting MGM can pull off a turnaround quicker than analysts predict. MGM is one of billionaire John Paulson’s top picks; he is the top fund owner of the casino stock and has over 3% of his 13F invested in the casino (check out Paulson’s newest stock picks).

Wynn Resorts (NASDAQ: WYNN) has 29 filers as owners to be the third most popular casino stock owned by hedge funds in 3Q. Revenues for 2011 were up 25%, with this casino resort operator also seeing solid growth from operations in China. Wynn trades in the midrange of the industry at 21x earnings, but showed positive trends of late with 3Q EPS coming in at $1.48 compared to $1.05 for 3Q 2011 and estimates of $1.26. Wynn is another casino stock that has showed commitments to returning capital to shareholders. Wynn recently announced plans to pay a special dividend of $7.50 and boosted its regular dividend yield over 100% to $1.00 per share. From a valuation standpoint, Wynn trades in line with its industry peers at 21x.

Las Vegas Sands (NYSE: LVS) came in at second with 31 filers. Again, Las Vegas Sands expects its growth to be driven by solid performance in Macau. Las Vegas Sands pays a 2.1% dividend yield, which is one of the highest in the industry. Las Vegas has also made recent initiatives to return capital to shareholders and might be the next gaming stock to explore the REIT structure. Las Vegas Sands recently announced a $2.75 special dividend. This comes after the gaming stock upped its regular dividend to $1.40 annually. Revenues are expected to be up 19% in 2012 before reaching double-digit growth in 2013 as well. In addition to its leading dividend position, Las Vegas has solid prospects in the Singapore market - a limited competition and high margin market - with its Marina Bay Sands resort. Billionaire investor and founder of Citadel Investment Group Ken Griffin was one of the firms loving Las Vegas last quarter; he upped his stake over 50% (see Ken Griffin’s newest picks).

Melco Crown Entertainment (NASDAQ: MPEL) came in as the top casino stock with 32 filers - after a net increase of 11 filers - the largest of our five stocks. Given the expected revenue drivers of the other four casino stocks, which are expected to see the majority of interim revenues driven by Macau properties, it is easy to see why Melco is number one. Melco operates primarily in the Macau region, where casinos are expected to outperform other areas such as Las Vegas given their greater exposure to rising discretionary income, which in turn, will spur higher visitation rates. Macanese gaming revenues were up over 40% in 2011 and should continue to accelerate in the future. This should help drive Melco's industry leading five-year expected EPS growth rate of 36% annually. Melco was one of Moore Capital and its billionaire founder Louis Bacon’s bullish bets during the third quarter.

We believe that investors might be able to find significant value in casino stocks as an increase in discretionary spending drives the industry higher, and the potential for unlocking shareholder value becomes evident with possible REIT conversions.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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