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It's important to review the performance of our investments, both good and bad. We can learn from our success and also our mistakes. But I prefer to learn from someone else's mistakes so I can tilt my investment scale more toward successes.
So let's go back to a much simpler time. When money came easy, the economy was booming, and there seemed to be an endless supply of 20-somethings willing to spend $20 per drink at Las Vegas nightclubs. Let's go back to the days when Las Vegas was the place to be.
It all started with rose-colored glasses
In the summer of 2007, Dubai World agreed to buy 14.2 million shares of MGM Resorts (NYSE: MGM ) at $84 per share and made a tender offer to shareholders at the same price. But the stock zoomed higher than the offer price and Dubai World ended up with only 14.55 million shares, a purchase that looked like a steal at the time. How could this possibly go wrong?
Yes, sir, I'll have another
Dubai World didn't just want shares in MGM; it wanted a piece of the most expensive private development in the U.S. After all, if you have ties to Dubai it's "go big or go home," right? So for a cool $2.96 billion, Dubai World got a 50% stake in CityCenter, one of the worst-timed developments in the history of mankind.
The hair of the dog
Like a gambler on the morning after a long night partying on The Strip, Dubai World may not want to check to see how much cash is left in its wallet. If we look at the return on these two investments and discount the additional cash Dubai World has had to pour into saving CityCenter and MGM, the picture isn't pretty.
MGM's shares trade at $13.10 as I write, so an initial $1.22 billion investment is now worth $190.6 million, an 84.4% loss even after the stock market's speedy recovery.
What is CityCenter worth today? I would argue it isn't worth the debt it has outstanding, but that can be debated. In the most recent quarter, the giant investment generated just $16.3 million in adjusted EBITDA. What we know for sure is that the value is nowhere near the $2.96 billion Dubai World originally invested.
Competitors Las Vegas Sands (NYSE: LVS ) and Wynn Resorts (Nasdaq: WYNN ) have been to the depths and back, but even if you had bought at the peak and held on you would be ahead of Dubai World's MGM investment.
Learning from Dubai World
Being fearful when others are greedy is a tough task, but it's especially important in gaming. Investors definitely got greedy in 2007 and have paid for it since.
Location, location, location. Keep on top of the hot gaming spots and whether they get overheated. Macau and Singapore have the advantage of government restrictions preventing overdevelopment. That may keep Las Vegas Sands, Wynn Resorts and Melco Crown (Nasdaq: MPEL ) from repeating the dive we saw gaming stocks take in 2008.
Stay on top of all that's going on in the gaming world by adding these stocks to My Watchlist.