I am The Hoff.
Recently, inspired by his Thousandaire 2011 stock picks, Kevin has asked me to post a weekly stock pick here. Since this is truly one of my passions, I jumped at the idea, and am here today to bring you the first weekly Thousandaire stock pick.
Over the next year I will provide you with a weekly stock pick every Monday (which will leave just enough time for Kevin to enter his Tuesday trades into Sharebuilder). We will keep tracking the performance of the thousandaire portfolio and keep you updated.
But before jumping into the first pick I wanted to give you a brief background behind my investment philosophy. I am a value investor at heart (with a poster of Warren Buffett on my wall), however I have my own spin. Instead of looking to closely at the cash value of a business (everybody can do this today with publicly available data), I look at the inherent value in their business model and brand. From a risk perspective, stock picking is inherently more risky than mutual funds and ETFs. I am in my 20s, which allows me to take greater risk, however you should carefully evaluate your own risk tolerance and make your own investment decisions.
Las Vegas Sands (NYSE:LVS):
Over the last few years the gambling industry has been hit hard by high debt and low profits. Casinos have a very high fixed cost and are therefore especially vulnerable to falling customer traffic (Apparently people don’t go to Vegas in the middle of a recession).
The outlook however is looking up. As the economy recovers, more people will again visit the Sin City (and other casino areas around the world). In addition, going forward the casino industry will have a much larger market as many debt-laden municipalities and states are looking to the gaming industry for extra revenue. You will see casinos open across the country in places you may not expect, like Columbus, Ohio.
Las Vegas Sands stock was at nearly $140 at its high in 2007 and this was before it had built a number of new casinos including their Macao properties (Macao is the Las Vegas of China, and as the Chinese economy grows, Chinese citizens will have more disposable income to part with). These new properties will present an opportunity for additional revenue in the future. Even when disregarding these new casinos, LVS still trades at a sharp discount to its 2007 high.
Alternatives?
There are a number of other casino stocks with similar fundamentals to LVS, MGM and Wynn just to name a few. If you don’t feel comfortable picking which company will come out on top, consider investing in a company that supplies to all of the above. Gaming Partners International (NASDAQ:GPIC) creates new high tech RFID gaming chips and controls 70% of that market (it is protected by patents until 2015). No matter which casino company comes out on top, GPIC will likely supply the chips.
When to sell?
The growth of LVS will be linked to the growth of its casino properties in Emerging Markets. When the profit growth of Macao slows, it may be time to sell.
LVS still holds a heavy debt burden which caused its stock to drop to under $2 during the credit crunch as analysts predicted bankruptcy. Pay close attention to LVS debt.
Disclosure:
I don’t own any
Kevin’s Take: You know what they say; “The house always wins.” I’d love to be invested in this stock because I think it will have very nice returns, but I’m not sure if I can be at peace with myself investing in a company that can ruin lives as effectively as a casino can. I understand it’s a person’s choice to gamble, but it is also an addiction. Do you feel there is a moral issue with investing in LVS or any other casino stock?
Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.
The stock is already up 161% 1 year….Do you think it is too late to jump in?
I will ignore the moral question since I just finished up an online poker tourney lol
All depends if you are a guy that looks at a glass half empty or half full. Yes, the stock is up 161% in 1 year (actually its up over 1000% in less than two years), but its also still down more than 60% from its peak. At this stage of the economic recovery it is difficult to find any stock that hasn’t had a fantastic rally.
Looking at the current earnings I would agree that this stock is slightly overvalued, however, you are not buying this particular stock for current earnings, you are buying it for future earnings. Back in 2007 when this stock was at $140, LVS had revenue of ~$3B annually, today it has around ~$2B QUARTERLY and rising steadily at $1/3B per quarter. Given revenue does not equal profits, however, once the now larger fixed costs (thanks to Macao) are covered, the profits will increase exponentially.
If you are looking for a safer, more value oriented investment, take a look at casino suppliers like GPIC, which is trading at 8.8 times earnings (compared to 50 for LVS). Also in this category are ITG and SHFL. These should also benefit from wider gambling legalization around the world.
I don’t think that the moral argument is so valid. Do you have any money in an S&P 500 index fund? Is it wrong to invest in it because Philip Morris is a part of it?
I do own shares of S&P 500 simply because there is no alternative. There is no S&P 500-M (M for moral). But I would never invest directly into a tobacco company. If nothing else I think its a bad investment (since smoking will disappear by 2050)
That’s a good point Daniel. I guess I am indirectly supporting some companies I disagree with by holding ETFs and mutual funds. And if I was going to pick a vice to invest in, I think gambling would be my choice (over smoking). I don’t think gambling is inherently bad, but some people can make it tragic. I’d say smoking is pretty much inherently bad.
I have been watching these gaming stocks for a long time and I am not personally convinced yet that Vegas is out of its funk. One that I have been watching in wonderment is MGM. I still think tough times are ahead for MGM as they are just facing what seems to be an insurmountable pile of debt.
I love these companies as a consumer though as Vegas is my favorite destination. 🙂
I also don’t think that Vegas is out of its funk. I do however think that they will be out in 5 years, or 10 years. I would not buy this stock to make a quick buck over the coming year. I would buy this stock with a 5, 10, or even 20 year holding in mind. As Warren Buffett said: “Our favorite holding period is forever”. I do really appreciate the feedback and will be adding a section for holding period in future stock picks blogs to better convery whether I think its a long term bet, or a short term gamble (I will have some of those too).
The ‘insurmountable’ debt is a very valid concern which is why I mentioned it as an item to watch closely. LVS does however have to be commended for reducing their long term debt by over 10% in the four quarters. As profits return, I will become less and less concerned about the level of debt casino stocks hold.