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One of a few undervalued sectors in the market after six months of this significant rally is the small casino space. I have several in my portfolio including Century Casinos (CNTY) and Dover Downs (DDE). I like these small operators as they are

  • undervalued
  • should benefit from an improving economy
  • selling at or under book and/or replacement value
  • are ideal rollup acquisitions.

One small cap play (Approximately $65mm enterprise value including debt) I like here is Full House Resorts (FLL).

Full House Resorts, Inc. owns, develops, and manages gaming facilities in the United States. It owns and operates the Rising Star Casino Resort in Rising Sun, Indiana that includes approximately 1,300 slot and video poker machines, 37 table games, 201- hotel rooms, 5 dining outlets, and 18-hole Scottish links golf course. It also owns Stockman's Casino in Fallon, Nevada that has 8,400 square feet of gaming space with approximately 260 gaming machines, 4 table games, and a keno game. (Business description from Yahoo Finance)

8 reasons Full House Resorts is significantly undervalued at under $3 a share:

  • Several insiders have bought shares in the last four months and the stock has seen net insider buying since April 2011.
  • Operating cash flow increased more than 150% from FY2009 to FY2011. Company now sells at under three times operating cash flow.
  • FLL sells at the bottom of its five year valuation range based on P/E, P/CF, P/B, and P/S.
  • The stock sells at just 6% over book value and 50% of annual revenues.
  • The company is underfollowed on Wall Street. However, the one analyst that covers the stock has a price target of over $5 on Full House Resorts.
  • The company has signed a letter of intent to sell all its interests in the Firekeepers management contract. The proceeds from this agreement will be used to extinguish the entire debt of the company among other uses.
  • After the Firekeepers management agreement is disposed of, for under $50mm; investors will be able to buy a company that owns several resorts with over 200 hotel rooms, a championship golf course, multiple restaurants, gambling licenses, etc. Add in the contracts to manage several other properties, and this stock is selling deeply under replacement value.
  • The stock is selling just over solid technical support (see chart).

Disclosure: I am long CNTY, DDE, FLL.