On a valuation basis, regional gaming stocks appear to be in the sweet spot for investors. Buying these stocks at a free cash flow yield of over 15% has historically been profitable. However, now more than ever one must take a macro view when assessing the fundamentals. I'd like to finally put to bed the argument that casino revenues are immune to macro factors such as the economy and changes in gas prices. Through my rigorous statistical process, I've found that regional gaming revenues are indeed tied to changes in gas prices and retail sales. Moreover, that correlation has grown as the industry has matured.

Changes in gas prices and retail sales are both statistically significant variables in explaining the change in regional gaming revenues over the last 7 years and over the last 14 years. I identify regional gaming markets as those that derive the dominant majority of customers from drive-in traffic. These markets include all of the riverboat gaming markets plus New Jersey and Michigan.

T stats for each variable for each period was over 4 (T stat over 2 is generally considered significant). As the following chart shows, changes in gas and retail explained 19% and 34%, respectively, of the change in regional gaming revenues over the two periods. Clearly, the relationship has been stronger in recent years.

So what does all this mean? Since the industry is not as defensive as we once thought, any investment decisions must be accompanied by a macro view. I don't think it means you cannot own any of the regionals. Free cash flow yields are very high and probably discount a lot of the macro issues. While gas is universally high, some economies are better than others. Pinnacle Entertainment (PNK) maintains significant exposure to the oil dependent states of Texas and Louisiana which are performing well, all things considered.