Gambling has been in the news quite a bit over the past several weeks. It started when the the U.S. government shut down the major online poker sites (including PokerStars and Full Tilt Poker), after revealing a sweeping indictment and charges of bank fraud and illegal gambling.

Recent news shows that the companies have reached an agreement with the DoJ to allow U.S. players to withdraw money that has been frozen in account since the original announcement.

What follows will likely be a long and messy lawsuit, but the fact remains that gambling, at least internationally, is stronger than ever.

Singapore opened two large casinos last year which have already generated $5.1b in the first twelve months of operations, a number that is set to grow more than 25% to $6.4b this year.

That number would pass Las Vegas to become the 2nd largest gaming location in the world, behind Macau.

According to CNBC:

Analysts say the voracious appetite for gambling among Asians and their growing wealth will drive momentum in Singapore’s casino sector for years to come. This is a stark contrast from the Strip, which has seen a slump in revenues for four consecutive months.

The 2,561-room luxury hotel Marina Bay Sands, which has a 200-meter-tall, boat-shaped SkyPark and a lavish casino equipped with 500 gaming tables, attracted more than 11 million visitors over the past year — 885,000 guests walked through its doors over just four days of the Chinese New Year holiday in February.

As a frequent visitor to Las Vegas, it amazes me that any other city could duplicate such a unique place, and yet Singapore pulling in more dollars than the entire Las Vegas Strip with only two open casinos — the growth throughout Asia is absolutely jaw dropping.

Gaming Partners (GPIC) supplies the casino chips that help facilitate all of this growth, and the company recently formed a new subsidiary, GPI Asia, to market all of their product lines to the Asian market.

Read the full article.

Disclosure

Long GPIC.OB

Hat tip to TraderMark @ Fund My Mutual Fund for the link

Empirical Finance just released a detailed research study that backtested a simple Ben Graham strategy for investing in stocks.

Backtesting Ben Graham

The backtest is based on a 1976 article in Medical Economics magazine, where Graham was interviewed and provided some tips on stock selection.

From the article,

“Graham believes that a doctor handling his own investments should be able to utilize those same principles to achieve an average return of 15 percent a year or better”

According to Graham, investors should look for two defining characteristics when picking stocks:

• P/E ratio of 7 or less
• Shareholder Equity ratio of > .50

Graham also goes on to recommend a portfolio of roughly 30 stocks and a holding period of two to three years.

Empirical Finance has done an amazing job of running the study based on these criteria. Here is the explanation:

“We decided to keep it simple and backtest the low P/E (<10), shareholder equity > .5 strategy from 1965–2010. We also backtested the results in accordance with the “trading rules” alluded to by Graham: stocks entering the portfolio are held for 2 years, or if they appreciate >50%. For robustness, we tested a variety of P/E and shareholder equity combinations–all results are very similar.”

It turns out that Graham was spot on with his return estimates:

Both the small and mid-cap backtests eclipsed the 15% CAGR metric for the study period.

It looks like the large-cap portfolio did not fare as well.

The study is great confirmation that Graham’s methods work, especially for the smaller stocks that are the focus of this blog.

And probably proof that many investors badly over-complicate their stock picking strategies – myself included!

As usual, a few of the best value investing links from the past two weeks:

Northern Oil & Gas (NGO)

Short. Northern Oil is an energy company that owns acreage in the red-hot Bakken Shale oil play in N. Dakota and Montana. The oil is recovered using a relatively new ‘fracking’ technique, where the rock is drilled horizontally and fractured, letting the oil seep out.

Oil & gas companies are generally outside of my circle of competence – one reason is the discretion associated with some accounting aspects.

NGO is finding a ton of oil, but according to the author, is accounting for depletion reserves in a different manner compared to other companies in the region.

If the depletion expense is accounted for like NGO’s competitors, the company would earn after-tax income of $3.3m – for a $1.7B market cap company!

See other articles here and here.

Syms Corp (SYMS)

Long. Syms is an off-price retailer currently selling at only 1/2 of book value. The company recently made a decent-size acquisition and is starting to benefit from synergies and cost restructurings.

The company is also sitting on a ton of real estate holdings, many of which are being carried on the balance sheet at a price much lower than market value.

One of their stores sits right in the middle of Manhattan in New York City, and the company even owns the air rights above the building to potentially expand.

SYMS has been the target of activist investors in the past, but it appears like management is prudently and deliberately trying to monetize some of these assets on their own terms – the CEO’s response letter to the activists is a must read.

Hollywood Media Corp (HOLL)

Work-out. Hollywood Media is a stock that has decided to liquidate and return cash to shareholders, and is now selling off the existing business lines.

The Broadway Ticketing division was sold in Q3 last year, and the company announced a tender offer for $2.05 per share. After repurchasing 8m shares (and refusing 16m more), the stock price declined sharply, as investors looking for a quick profit moved on to other opportunities.

HOLL is in the process of selling it’s MovieTickets.com business, a potential catalyst that would simplify the balance sheet and help close the discount to the calculated liquidation value.

Centrix Bank & Trust (CXBT.PK)

While the purpose of Weekend Values is to showcase write-ups on other sites, I’m going to make an exception and point out an excellent primer and introduction to bank investing from a recent guest post.

Banks are outside of my normal circle of competence, but they do offer the opportunity for outstanding returns, but only if an investor is performing careful due diligence.

While this write-up isn’t a short or long recommendation, it does show the type of analysis required when looking at these institutions.

My favorite quote regarding investing in banks:

“So we have a huge number of stocks that few people are analyzing or investing in, that are also cyclical, complex, boring, illiquid, and obscure.”

Read Part 2 as well.

Suggestions

If you have suggestions for detailed analysis examples from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.