Closing out “Capone’s Legacy” … Cigars, Cigarettes, Slot Machines?

By Travis Johnson, Stock Gumshoe, August 13, 2008

I’ve probably thrown out more chatter than anyone can tolerate about Al Capone and sin stocks, so maybe now we should just go through the three remaining “sin stock” teasers, in businesslike fashion, with a minimum of interruptions …

Capone’s Legacy Stock #4 from Karim Rahemtulla … “How to Book 548% From the Slots”

“This company is a global leader in the high-tech gaming industry. From the design, manufacture, and marketing of computerized gaming equipment, it’s involved and profiting in casinos around the world.

“But this company got a huge break by making a gamble of its own… when it won the rights to offer financing to Native American tribes to get casinos up and running.

“And this gamble is paying-off… It has returned 548% in the last ten years, but for a couple of reasons the growth is just beginning…

“First as the legalization of gambling continues to expand in the United States, so will this company. And second, it’s having incredible success with online gaming. It owns the licensing rights to major titles like Wheel of Fortune and Indiana Jones, for instance.

“And that’s why it’s an incredible opportunity right now, and over the next 12-18 months.”

This is another beaten down star from the gambling firmament — International Game Technology (IGT)

It’s hard to mention this one without also sharing that it, like so many others in the space, has had a ridiculous fall from grace — the shares were trading for close to $50 six months ago, and last week you could have bought them for $22. They’re still well under $25 as I type this, even though the market has been slightly kinder to them this week.

On a valuation basis, it’s a little pricey still, you’re still trying to buy growth here, not current earnings. It does have a decent yield of over 2%, which ain’t bad. If you want to follow these kinds of stocks, you might also have a look at the Vice Fund — it’s a gimmicky mutual fund with a huge expense ratio that invests in vice stocks, but until this year it was doing fairly well so it’s sometimes interesting to take a look at their portfolio. IGT was in their top ten as of the last quarter’s reports, though like all gambling stocks it has probably fallen out of that ranking (due to decline in price, not necessarily because it was sold). Vice Fund was adding to Las Vegas Sands last quarter, but otherwise seemed to generally be selling gambling stocks in favor of booze, cigarettes and war machines.

IGT’s claim to fame is that they sell popular branded slots (including those Wheel of Fortune ones you’ll see in almost any American casino) and progressive, linked slots that are theoretically more fun and exciting. I can’t stand slot machines, and most of the growth in Asian casinos seems to be in table games, which have historically been a huge portion of the business there, so I’m not sure what the future holds for an expensive, leading edge slot machine maker. There is certainly a big US market, since many of the states that have big budget deficits are climbing over themselves in an effort to built slot machine parlors, and there’s probably all kinds of mumbo jumbo in the business about a “upgrade cycle” for slot machines, but I don’t know if the market will be generally up or down for this business. Analysts predict growth, but not stunning growth.

So, that one’s your call — I think I’d rather buy a Wheel of Fortune slot machine if the DC government would let me set it up on my porch, but there’s probably a decent case to be made for these shares if you’d care to do so. The Gumshoe’s movin’ on …

To Capone’s Legacy Investment #5

“‘I Like the Cigarette Business’ ~ Warren Buffett

“This is one of the world’s leading tobacco manufacturers, distributors and sellers.

“And Warren Buffett agrees that the tobacco industry is a great investment. As he put it, ‘I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty.’

“This company’s roots go back to Capone’s heyday. It has over 300 brands of cigars and cigarettes in its portfolio. In fact, one in eight smokers in the world uses one of its products.

“Since January 2000 this investment has returned a remarkable 722%. The potential gains with this company over the next few years are tremendous.”

That’s a nice little irony, because I think I read from the WHO that one in eight deaths is related to smoking. But I’m not here to talk about why I don’t like cigarettes, I’m here to tell you the name of the company being teased. It is …

British American Tobacco (BTI)

This is one of the few large tobacco companies left these days — very international focus, they make Pall Mall, Kent, Lucky Stroke, Dunhill, and lots of other brands, and also cigars and smokeless tobacco. Their major competitors that are traded here are Lorillard and Phillip Morris International, I imagine, but I don’t study this business or buy these stocks. Feel free to comment if you’ve got a BAT opinion.

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And finally,

“Investment #6 — How to Turn $10,000 into $146,295”

“This international tobacco powerhouse has tremendous potential to hand you sizeable gains fast, and it’s a solid addition to any portfolio.

“A $10,000 investment in this company back in 1980 would be worth close to $146,295 today.

“Plus, you’d collect dividends of over $15,000 annually.

“With a projected growth rate of 12% it should continue to hand investors’ nice returns over the next year.”

Well, they really petered out with the clues there at the end, I’m afraid, and there’s a limit to the amount of time I’m willing to throw away researching tobacco stocks, so I don’t know who this is. My suspicion is that it’s probably Philip Morris International (PM), and this is a company that’s probably somewhat difficult to put into historical context since they’ve just recently become independent from parent Altria (MO). Or maybe Karim thinks you should buy Altria, a popular income stock. I suppose it’s possible I might buy Kraft Foods some day, but that’s the only member of the Altria family that holds any interest for me.


Well, a brief run of sin stocks for you — these are supposed to be recession-resistant, I’d argue that the casinos and their service companies like IGT sure don’t seem to be, but there is some historical argument to be made along those lines for cigarettes, beer and liquor.

I’ll take mine a short glass, please with an ice cube and the merest whiff of soda.



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Pete Ewing
Pete Ewing
August 13, 2008 9:51 am