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One would be hard pressed to find a sector that benefited more from the easy money era than gaming. Unfortunately, for investors in many of these stocks we’ve come to the end of an error. Throughout most of the decade, gamers exploited the low interest rate environment to over invest and over leverage. Wall Street loved it. Long term IRR and ROI? Who cares? Growth and EPS accretion, where do I send the check? Gaming stocks outperformed the S&P by a wide margin over the past decade. As the chart shows, the level of outperformance correlated very closely to the inverse of the US corporate bond yield. In fact, the level of interest rates explained 62% (R Square=0.62) of the spread between gaming stocks and the S&P.

It should come as no surprise that gaming stocks have been pummeled by the recent credit crisis. Gaming management teams left their companies with super high leverage and significant debt maturities in an environment where cash flows are declining. As these companies refinance over the next year or two, it will become crystal clear how much they’ve over earned the past few years.

Of course, there are exceptions. There are companies on the right side of this liquidity trade. BYD, PENN, and WYNN all maintain low relative leverage and tremendous liquidity. The rest of the gamers have had religion crammed down their throats by the credit markets. BYD recently found religion on its own and suspended Echelon. WYNN and PENN never lost it.

Gaming stocks outperformed the S&P during the easy money era