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 ei