I recently played poker for the first time in a Texas Hold 'Em tournament. I had no idea what I was doing yet still managed to place fourth. Now, I'm hooked on Lakes Entertainment's (Nasdaq: LACO) World Poker Tour, and whenever I visit a Las Vegas casino, I eschew dice and blackjack in favor of the felt-covered oval tables. The reason is simple. I am much more likely to either win or lose a little bit playing poker than lose big bucks at the other games. In poker, the casino has no statistical edge.
Investing can be like gambling in many ways. One difference is that investing has a positive expectation over the long term, while gambling does not. That's why I put Wynn Resorts (Nasdaq: WYNN) in the category of gambling, not investing.
The stock trades at $53.29. The company's market cap is $4.75 billion. The company is building a luxury resort-casino in Las Vegas due to open in April 2005 and expects to carry about $1.8 billion in debt when the resort opens. But at this moment, there is no hotel or casino. It's all under construction.
So why is the stock trading at four times book value? Because investors are gambling on one thing: visionary hotelier Steve Wynn. The new resort will probably outstrip his previous successes. Probably. Possibly. Maybe. Investors are putting all their chips on double-zero and hoping the ball drops in for a big payoff.
But what if something goes wrong in the interim? What if something happens to Mr. Wynn? What if the competition, like recently mergedMandalay Resort Group (NYSE: MBG) and MGM Mirage (NYSE: MGG), finds ways to steal away business? What if another terrorist attack crushes leisure travel? What if they just build the resort, and nobody comes?
Any company has risks. Some of them even come to pass; look at Merck (NYSE: MRK). The difference is that most established companies have lots of products to fall back on, alternative growth strategies, a solid balance sheet, or other ways to generate cash flow.
But Wynn Resorts will only have big interest payments to make, and the name Trump Hotels (NYSE: DJT) rears its ugly head. Even if everything does go right, the resort must get dealt pocket aces and have heaps of success to justify the current stock price. To me, this isn't investing. It's betting on the roulette wheel. Thanks, but I'll stick to poker.
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Fool contributor Lawrence Meyers does not own shares in any of the companies mentioned but knows the difference between a pair and a full house.
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