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Tickers in this Article: MGM, WYNN, LVS, BYD
For years now, I've been writing about casino stocks for two reasons. First, the space excites me a great deal. In what other business do people come through the doors excited, yet know the odds are they will lose money while there? Second, companies in this space have the potential to grow in years to come. (To read about avoiding investment losses, check out Protect Yourself From Market Loss.)

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The space was in the spotlight earlier this month, thanks in large part to upbeat revenue numbers from Macau during December. Macau has become a hot destination in recent years and is located in China.

But if you think all this means I'm bullish on some of the bigger casino names, you're mistaken. In fact, I think many stocks in this space are ripe for a fall.

Why My Reels Aren't Spinning
Many of the big names have had a huge run since the spring of 2009. For example, MGM Mirage (NYSE: MGM) has seen its stock rise from the low single digits, under $2 per share in the spring, to currently trading at around $11.50. Las Vegas Sands (NYSE: LVS) has seen its stock rise from under $1.40 per share to its present position, hovering around the $18 mark. But again, I think the run is severely overdone.

My No.1 concern is that I don't see many average people traveling, or even pondering expensive vacations in the months to come. And I'm not convinced that placing money into a slot machine or laying it on a hand of poker or "21" will sound too attractive to many, particularly until the job market shows some real life. In essence, the macro picture doesn't seem to match the rise in the escalating stock prices.

Earnings Picture Unimpressive
Another big problem is the earnings picture isn't impressive either. For example, casino giant Mirage is expected to lose 53 cents a share in 2010. Las Vegas Sands is expected to earn 28 cents a share in 2010, but the figure is not enough to justify the stock price. Wynn Resorts (Nasdaq: WYNN) is expected to earn 59 cents a share in 2010, but it trades at more than $65. Finally, in 2010 Boyd (NYSE: BYD) is expected to earn 50 cents a share, but it is trading at almost 200% above its 52-week low.

In my opinion, gaming has several other concerns as well. For example (I'm not pointing out any one company here), if difficulties arise and a company must conduct an asset sale, there probably won't be many bidders at high prices. Also, if interest rates eventually rise, that will make much-needed casino borrowing more expensive. Keep in mind that running these types of facilities is typically very expensive as are doing refurbishments.

What To Look For
Many investors have some nice paper profits from casino stocks in 2009. But if this market turns, investors will revert to more fundamentally solid companies and move onto greener pastures. If I'm right, that could eventually create a nice opportunity for patient investors. Again, long term I see lots of promise here. But near term I see risk because I feel the investment community has been way too upbeat with this sector.

Bottom Line
I think the prospect of rising interest rates is a major factor. An increase in borrowing rates could make casino refurbishments and development more difficult. In addition, there is a risk that some investors could book profits and place selling pressure on some of these stocks. Finally, I am concerned that the group as a whole has had a pretty large run and is due for a pullback or breather. That said, if the group pulls back as I expect, it could ultimately present an opportunity for patient investors. (Market conditions change in the blink of an eye. To find out how you can make money in both cycles, read Riding The Bear Into A Bull Market.)

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