The Poker Boom Is Over: Short Casino and Gambling Stocks

by: Danny Furman

If all major sports organizations were publicly traded, many retail investors would at least have a decent general understanding of one sector. When the Cleveland Cavaliers drafted hometown hero Lebron James, no surer success was apparent in the business world. Michael Jordan's hiatus from basketball in the early 1990s clearly diminished the Chicago Bulls and NBA. David Beckham's move to the USA and Tiger Woods' marital fiasco represent similarly explosive changes in sports business.

While it is shown regularly on ESPN and the classification is often made, calling poker a sport is still difficult. The game does, however, require great discipline and skill. No player has shown the ability to succeed in a variety of games over an extended period of time like notorious rounder Phil Ivey. The 35-year-old is the winningest cash-game player in Atlantic City, Las Vegas and online.

Poker's popularity boomed after Chris Moneymaker won the 2002 World Series Main Event. Since then tournament prize pools and cash game popularity have soared, inspiring many of the world's brightest young minds to forgo higher education or professional careers to compete on the felt. As poker becomes increasingly competitive, social players lose interest and games become tougher to beat. In the early 2000s fundamentally sound card play was sufficient to make a living in one's underwear while fixated on a virtual card table. Today winning online play requires intricate reading skills previously applied only in live games.

April 15, 2011 is referred to as Black Friday in the online poker community. A federal investigation discovered suspicious fund transactions and shut down access to all major online poker rooms from U.S. players. Funds were ordered to be refunded immediately.

Ivey is boycotting the 2011 World Series because his sponsor, Full Tilt Poker, has yet to return $150,000,000 owed to players from the USA. Beyond his absence, the event will be relatively barren due to the lack of American online qualifiers. The dream lived out by Moneymaker has been snatched away from many thousands, if not millions, of small-time players across the nation. With fields limited to entrants directly buying in for thousands and qualifiers from abroad, events will struggle to exceed a small fraction of their size in recent years past.

Without its most recognizable figure and the medium on which the "sport" relies most for growth, the immediate future of poker is dismal. The World Series is currently underway and no event yet has reached a thousand entrants.

Furthermore, poker's popularity in the United States appeared to peak with the economy. Fields of tournaments with buy-ins of $10,000 or more have dwindled across the country since 2008. Recent developments are stunting interest from competitive youngsters as well as established fans of the "sport." Stagnant wages along with rising food and energy costs don't help America's gambling budget either.

Investors can profit from the end of the poker boom by shorting Las Vegas casinos, poker equipment manufacturers and gambling software creators. Shuffle Master (NASDAQ:SHFL) makes automitic card shufflers mostly demanded for poker. CryptoLogic (NASDAQ:CRYP) creates online gaming software. International Game Technology (NYSE:IGT), WMS (NYSE:WMS-OLD), Boyd Gaming (NYSE:BYD) and Bally Technologies (NYSE:BYI) are leading slot machine makers that depend on heavy casino traffic. Casino operators MGM Resorts (NYSE:MGM), Wynn (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) stand to lose out most certainly, however all have diversified into China's growing gaming capital of Macau. MGM has a less profitable operating history and Macau accounts for a smaller share of overall business than LVS or WYNN, making it the leading short candidate. SHFL and the major slot machine makers may be viable business, but are priced optimistically. Shares offer immense potential downside versus upside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SHFL, MGM, BYI, BYD, IGT over the next 72 hours.