Speculation’s Spread
Atlantic City and Las Vegas have traditionally been the established gaming hotbeds. But today there are many more places to roll our dice. Casinos dot Native American reservations across the country; at last count there were 330 of these in operation. In California alone, where there are 106 Native American casinos, experts estimate that gaming is a $5 billion-a-year business.

These casinos are quite profitable for their owners, in part because management knows how to manage tax payments. States tax casino revenue from slot machines. They do not tax revenue from table games, such as blackjack and craps. As a result, table games are expanding quickly on reservations. I suggest investing in one of the publicly traded casino operators that are partnering with the various tribes to manage their casinos. Alternatively, I advise looking into the private partnerships that are helping these tribes develop their casinos.

A handful of states now permit slot machines at horse racing tracks, and some even allow video poker machines. That handful will increase as more state governments realize that they can collect significant revenue through gambling. State budget deficits have ballooned, and gambling revenues could provide some relief. For the gaming investor, these budget woes and the lure of state-endorsed gambling spell opportunity. Investors can position money with publicly traded racetracks, companies that manufacture video poker machines or, as discussed above, even go so far as to obtain a gaming license. With state governments predisposed to expand gaming revenues, we might find it becoming easier to do today than in years past.

States are not altogether in the business of stacking the deck for investors, however. State governments have become so intoxicated with all this potential revenue flooding their coffers that taxes on gambling have risen inordinately. For example, New Jersey Governor James E. McGreevey has proposed increasing the state’s 8 percent casino tax rate to 10 percent. This has rankled both the casino owners and their investors. In the wake of the proposal, companies owning Atlantic City casinos lost $700 million in market value in two days. Companies that were considering development plans in Atlantic City pulled their chips off the table. MGM Mirage, which was planning to build a new casino, and Park Place Entertainment, which envisioned a parking garage and hotel tower, have held off.

Even if states put the squeeze on casino gaming, we need only look south for another promising prospect. Mexican legislators may soon make casino gambling legal. President Vicente Fox recently voiced his support for gaming. This could launch a $3 billion-a-year industry, experts estimate. Mexican casino licenses could be good investment bets—if and when they become available.

Caroline Waxler is the author of Stocking Up on Sin: How to Crash the Market with Vice-Based Investing.