Gaming Stocks Are Scorching Hot: Here's How to Play It

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I hate to say I told you so, but I did. Gaming stocks were cheap last Friday when I wrote an article titled "Gaming Stocks Are Starting to Look Cheap." And earlier this week, I said the sell-off was still overblown, and soon gaming stocks would explode higher.

Gaming stocks have rocketed higher in the last two days not only because of hope that the worldwide economy wasn't heading into a tailspin, but because of the market realization that even slower growth wasn't all bad for Macau gaming. Sure, gaming may not grow in excess of 50% year over year, but that's an unsustainable growth rate for the long term.

The best stock out there today
Before the fall of gaming stocks in the last couple of weeks, my pick for the best stock in gaming wasLas Vegas Sands (NYS: LVS) based on the company's growing business in Singapore and it owning the only casino opening in Macau in the near future. But Las Vegas Sands hasn't fallen nearly as far as Melco Crown (despite its pop yesterday), so the valuation of these companies has changed a little.

As I've done in the past, we'll use enterprise value/trailing property level EBITDA to determine value with gaming stocks. Here's how they stack up right now.

Company

Market Cap

Trailing Property EBITDA

Enterprise Value/Trailing Property EBITDA

Las Vegas Sands

$30.5 billion

$3.03 billion

12.2

Wynn Resorts (NAS: WYNN)

$16.0 billion

$1.49 billion

11.7

Melco Crown (NAS: MPEL)

$5.0 billion

$624.7 million

10.1

MGM Resorts (NYS: MGM)

$4.5 billion

$1.35 billion

12.2

Source: Company releases.

As you can see the drop in shares of Melco Crown have made them much more attractive compared to Wynn Resorts and Las Vegas Sands. In the long term, each of these companies will benefit from growing gaming in Macau, but based on the company's smaller size and lower valuation Melco is starting to look like a great buy if the right opportunity arises.

When to buy
Melco's price is decent right now, but Las Vegas Sands isn't much more expensive when you consider the company's new casino in Macau and its growing operations in Singapore. However, a few days ago Melco's shares were trading as low as $7.32 per share, a steal in the gaming industry. If shares collapse below $8 again, I think that's a screaming buy considering Macau's continued growth.

The risk factor with Melco is its wild swinging margins in Macau compared with competitors'. Las Vegas Sands will be much more stable in the long term, but if the right buying opportunity presents itself Melco Crown can give investors great value despite the risk. Just make sure you're getting a good discount for the company's stock.

Interested in reading more about Melco Crown? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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