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Tickers in this Article: WMS, IGT, MGM, LVS
One area that has certainly taken its fair share of punishment in the weak economy has been the gambling sector. That makes sense when you think about it. With unemployment and foreclosures surging, consumers that are struggling to pay their bills aren't going to head to the Bellagio or Caesar's Palace to gamble away their money. Spending money on gambling might be the most discretionary of discretionary spending and when times are tough, casinos are going to get less traffic.

IN PICTURES:
Digging Out Of Debt In 8 Steps

That scenario has definitely played out since late 2007. Just look at the two-year charts for MGM Mirage (NYSE: MGM) and Las Vegas Sands (NYSE: LVS), two of the biggest casino operators in the world. The most applicable adjective for these charts is ugly. MGM flirted with $100 a share in late 2007 before tumbling all the way to $1.81 in March. The pain was even worse for Las Vegas Sands shareholders. That stocked traded over $144 a share in late 2007 before falling to $1.38 in 2009.

Sure, these stocks have sort of bounced back. If you had bought either of them in March you had two multi-baggers on your hands. That's nice, but it doesn't change the fact that Las Vegas casinos are still suffering from a lack of traffic. However, that doesn't mean there isn't opportunity in this sector of sin; here's how to actually make money from slot machines.

One-Armed Bandits, But Not For Shareholders
WMS Industries (NYSE: WMS) 52-Week Return: 37% Forward P/E: 20
This company is one of the largest makers of slot and video poker machines and if you've ever been to a casino, you know just how profitable these machines can be. Folks become captivated by these things and camp out in front of them for hours, which make them huge money makers for casinos. Slot machines have been a popular option for cash-strapped states that don't want to open full casinos, but need to plug holes in their budgets.

Even though companies like Las Vegas Sands and MGM have come awfully close to bankruptcy, WMS has been a stellar performer, up almost 37% in the past 52 weeks. The shares came within four cents of their 52-week high on August 14, but have peeled back a little bit since and that may signal a buying opportunity for patient investors.

What makes WMS worth a look at this point is the fact that it did something not many other companies did during the most recent earnings season: it increased sales. Revenue rose five percent in the second quarter and that helped profits increase by 36% to $28.4 million, or 49 cents a diluted share, compared with $21.6 million a year earlier. That beat analyst estimates of 47 cents a share. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

At less than 20 times forward earnings, WMS looks cheap and it's sporting growth traits. For fiscal 2010, WMS expects sales of $760 million to $780 million, on par with analyst estimates of $775 million. J.P. Morgan took note and upgraded WMS to "overweight" from "neutral." Maybe you should too.

A Lagging Rival, But Is It Ready To Run?
International Game Technology (NYSE: IGT) 52-Week Return: -8.6% Forward P/E: 23
This company competes head-to-head with WMS, though it might appear IGT is getting the short of the stick as the stock is down almost 9% in the past 52 weeks, but investors may be starting to awaken to IGT's story. The stock has tacked on almost 50% in the past six weeks. J.P. Morgan also sees potential with IGT and raised the shares to "overweight" from "neutral" on August 18.

Investors should note that IGT does have to deal with a class action lawsuit that alleges former CEO TJ Matthews dumped shares at optimal prices in late 2007 and early 2008 before IGT's share price plunged. The company has a new CEO that J.P. Morgan praised in its upgraded report.

That being said, some analysts believe that IGT is a tad overvalued at current levels and a real recovery in slot machine demand may still be a ways off. One analyst pegged a recovery for IGT's shares for somewhere between 2012 and 2014.

The Bottom Line: A Clear Choice
Even though it can be risky to buy stocks as they're making new highs, WMS could be worth a play on a pullback. Buying the dips has been the way to play the recent rally anyway. Not to knock IGT, but you might need a longer time horizon to see substantial profits there. Stick with WMS.

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