Renewed Interest in Gaming Stocks

2016 was a strong year for casino and gaming companies. The Dow Jones Gambling Index (DJCUSA) delivered a 41% return, easily beating the Dow’s performance. The 3 biggest Las Vegas companies, MGM (NYSE: MGM), Wynn (NYSE: WYNN) and Sands (NYSE: LVS), outperformed the Dow by significant margins.

Despite falling flat–or perhaps because of it–analysts and industry insiders find cause for optimism in the year ahead. The consensus among analysts was that casinos were overburdened by debt and struggling to attract new customers.

But 2016’s strong gains propelled renewed interest in gaming stocks, in particular, commentators have noted strong growth in online gambling. Take a company like Bingo Nation Inc (OTCMKTS:BLTO), one of the players in the ‘digital gaming’ space. They are a multimedia gaming company that develops and licenses technologies revolving around a televised bingo game draw. The strong gains they have reported since debuting on the markets in 2011 is an indication gambling stocks will continue to grow.

2016 was a good year for the stock market as a whole. U.S. stocks saw strong gains, ranging from 9.5% to 20% depending on which index you were looking at. Small-cap stocks had a particularly strong year, with gains of around 20%, as measured by the Russell 2000 index.

But if 2016 was a good year for stocks ‘in general,’ it was an even better year for gaming stocks. The Dow Jones U.S. Gambling Index (INDEXDJX: DJUSCA) had a return of over 40% in 2016–doubling the Russell 2000 and quadrupling the S&P 500. Although gambling stocks have retreated a bit in 2016 (down to 694 from a high of 740 earlier this year), the sector overall still appears to have had a good run.

But the question is, can gaming stocks keep it up? And if so, which ones are the likely winners?

U.S. lotteries brought in approximately $70 billion in revenue in 2015. Of that, about 50% was paid out to winning ticket holders, 5% went to administration, and 45% was “pure profit” for the states running the lotteries. So, if “the lottery” was a corporation, it would bring in around $28 billion in annual profit–and that figure rises every year.

What does this have to do with gaming industry stocks? As you might know, Powerball is a public venture–the proceeds go to state governments. It was set up in 1987 by the Multi-State Lottery Association (MSLA). Before the MSLA was set up, it was illegal to run a nation-wide lottery in the United States. But by arguing that the proceeds of a nation-wide lottery would go to individual states, the MSLA was able to successfully create the lottery that would eventually become Powerball.

Needless to say, Casinos on the Las Vegas strip aren’t going to duplicate this feat any time soon. However, by having an affiliation with Native American tribes the advantages are similar to what the Powerball had when starting in the 80’s–the members who administer the games are considered “government” entities.  Under U.S. law, tribes are considered “sovereign”; that is, entitled to make their own laws and govern themselves. That’s why Native American tribes operate so many of the country’s largest casinos; they are able to operate in regions where big corporations can’t.

Companies like BingoNation that provide all the infrastructure to the tribes for digital gaming, could be particularly well positioned in the gaming sector.

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