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A Red Flag Over Lakes

By Jeff Hwang - Updated Nov 16, 2016 at 5:10PM

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A management focused on its stock price is a good reason to fold.

At the Berkshire Hathaway (NYSE:BRKA) annual meeting on Saturday, an investor asked how he might determine if his employer's motivations aren't in the right place. In response, Warren Buffett suggested that one sign would be a company that lists its stock price at the front door.

As if on cue, Lakes Entertainment (NASDAQ:LACO) -- which develops and operates Native American-owned casinos and owns 80% of the increasingly popular World Poker Tour -- reported earnings yesterday. Following the numbers rundown, the first statement from Lakes' CEO Lyle Berman:

Our stock price hit a new high this quarter as we continue to implement our previously stated business strategies of eliminating risk, growing our assets and diversifying the company.

Here's the thing: It's not like the company missed an analyst estimate or something silly like that (though it's worth a mention that no analysts cover the company). But a poker player always looks for a reason to fold. And as I wrote myself in Companies on the Road to Ruin less than two years ago, a management that fixates on stock price is one of those reasons.

So, as a shareholder, I'm conflicted.

On one hand, Lyle Berman and Lakes have a solid track record of developing casinos. After all, this is much the same management that built Grand Casinos prior to Grand's Mississippi casinos merger with Caesars Entertainment (NYSE:CZR) over five years ago. The four casino management contracts Lakes ended up with following its spin-off were good for $5.71 per share (pre-split) in earnings in 1998, though those contracts are long gone.

Lakes has four such development projects in the pipeline awaiting regulatory approval, the first of which should come online in 2005. Further, the company has a table games development business -- a business in which Shuffle Master (NASDAQ:SHFL) has demonstrated almost eBay-like (NASDAQ:EBAY) margins. Just this morning, Lakes announced a new casino game carrying the World Poker Tour brand.

Lastly, the World Poker Tour itself is expected to be profitable this year.

On the flip side, Berman himself doesn't have a reputation for being shareholder-friendly. He has led management buyouts of his family's leather business -- now called Wilsons The LeatherExperts (NASDAQ:WLSN) -- on two occasions. Then there was the time he used Lakes to threaten to buy the flailing Rainforest Cafe, a company he helped start and for which he served as CEO, prior to its sale to Landry's Seafood Restaurants (NYSE:LNY) in 2000.

Though Lakes is no longer a pure value play, I sincerely believe that there's a lot of upside to this company and its stock. But the more I think about it, the easier it becomes to back away from my Lakes Entertainment shares.

What do you think? Talk it over on the Gamblin' Fools discussion board.

Fool contributor Jeff Hwang owns shares of Berkshire Hathaway, Lakes Entertainment, and eBay.

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