I continue to like the gaming sector in this market environment. Specifically, I like the small operators with a presence in solid economies. Their stocks tend to be underfollowed and cheap. In addition, they should benefit from falling gas prices as a high proportion of their customers drive to their destinations and have no exposure to the weaker economies of Europe. Finally, I believe they will be part of increasing M&A activity as rollup targets of either bigger operators or private equity firms that are looking for acquisitions with solid cash flow and reliable revenue streams. Here are two small stocks in the space that I like right now.
Century Casinos (CNTY) owns and operates eight casinos in Canada, Poland and the U.S. It also operates 12 ship-based casinos on four cruise lines.
Four reasons CNTY is a solid speculative play at $2.50:
• The stock is cheap at 53% of book value and less than 9x forward earnings.
• Twenty-five percent of the stock's market capitalization is represented by the net cash of its balance sheet.
• The company has beat earnings estimates for the last three quarters and consensus earnings for both 2012 and 2013 have risen over the last two months.
• CNTY is selling near the bottom of its five-year valuation range based on price-to-sales and price-to-book ratios. Only three analysts cover the stock. Their price targets range between $3.50 and $4 per share.
Full House Resorts (FLL) owns and operates two casinos, in Nevada and Indiana, and manages two others, in Lake Tahoe and Sante Fe, N.M. It is also taking over a casino in Mississippi.
Four reasons FLL is a worth a gamble at less than $3 a share:
• The company is going through a transformation right now. It recently sold its interest in a casino in Michigan where it was a joint partner. It is directing those gains into buying the full interest in the Silver Slipper casino in Mississippi, close to New Orleans.
• FLL stock has experienced net insider buying over the past nine months, and management has made numerous positive comments about how it is repositioning itself.
• The stock is cheap at 69% of book value and less than 50% of expected annual revenues.
• The two analysts that cover the stock have price targets of $5 and $5.50 per share, respectively, on Full House Resorts.