Place Your Gaming Bets -- Carefully

New to this week's relative strength rankings: Casino and gaming stocks. S&P's analyst has three top picks in the group

By Sam Stovall

continue to be dominated by industries from the economically sensitive S&P sectors: Consumer Discretionary, Industrials, and Materials. Investors have bid stocks in these industries higher on hopes for an economic recovery sometime later this year.

The latest addition to the list, Casinos & Gaming, may be the ultimate example of a "Consumer Discretionary" industry. This group includes shares of casino-hotel operators, gaming machine manufacturers, and lottery companies. In 2001, the S&P Casinos & Gaming Index rode a nice winning streak, rising 27.2%, vs. an 11.8% decline for the S&P 1500 Index.

S&P analyst Thomas Graves says his overall investment outlook for the gaming stocks he follows is moderately favorable, but his opinions on individual issues vary.


  His favorites in the group include casino-hotel company Park Place Entertainment (PPE ), which carries an S&P ranking of 5 STARS (buy). He also likes slot-machine manufacturer International Game Technology (IGT ) and lottery services and products company GTECH Holdings (GTK ), both of which are ranked 4 STARS (accumulate).

But Graves is less bullish on the stocks of some other industry players, especially casino operators. On the Las Vegas "Strip," gaming revenues were down slightly in the first 11 months of 2001 as the U.S. recession took hold. But the industry was hit with larger declines in October and November, following the September 11 terrorist attacks.

Graves notes that in general, gaming markets with a higher percentage of drive-in or regional customers have fared better than Las Vegas' Strip since September 11. With cautious casino operators reining in new spending, he doesn't expect a large amount of new U.S. gaming industry capacity to debut in the year ahead. He does expect further industry consolidation.


  Gone are the days when the only casino action was in Las Vegas or Atlantic City, N.J. Casino gambling is now legal in more than 20 states, compared to just two (Nevada and New Jersey) 11 years ago. Graves notes two main reasons for this geographic expansion: the desire of localities and states to create jobs, spur tourism, and rake in tax dollars; and federal approval of legislation that opened the door for Native Americans to own or operate casinos in various states.

While Las Vegas and Atlantic City remain by far the biggest U.S. casino markets -- each with annual casino winnings of more than $3 billion -- Graves expects California casinos to become a more significant factor in coming years. The Golden State may see more casino activity on Native American land in the wake of an amendment to the state's constitution that was approved in March, 2000.

What about other gaming businesses besides casinos? Lotteries are currently operated by more than 30 states. For U.S. lottery-related companies, long-term growth is most likely to come from international markets and from the introduction of new games in existing markets, according to Graves. S&P does not have stock recommendations on any parimutuel (horse-race wagering) companies.

S&P Relative Strength Rankings

These industries carry six-month relative strength rankings of "5" as of Jan. 18, 2002 -- meaning that they're in the top 10% of the 115 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior six-month price performance.

Industry/Sector Largest Company (Market Cap.) S&P STARS* Rank
Air Freight & Couriers/Industrials FedEx (FDX) 5 STARS
Casinos & Gaming/Consumer Discretionary Park Place Entertainment (PPE) 5 STARS
Computer & Electronics Retail/Consumer Discretionary Best Buy (BBY) 4 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR) Not Ranked
Distributors/Industrials Applied Industrial Technologies (AIT) Not Ranked
Footwear/Consumer Discretionary Reebok (RBK) 4 STARS
Household Products/Consumer Discretionary Church & Dwight (CHD) 4 STARS
Metal & Glass Containers/Materials Pactiv Corp.(PTV) 5 STARS
Office Electronics/Information Tech. Xerox (XRX) 3 STARS
Oil & Gas Refining/Energy Valero Energy (VLO) 4 STARS
Water Utilities/Utilities Amer. Water Works (AWK) 3 STARS

* S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is senior investment strategist for Standard & Poor's

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