As we close the book on 2006, it's safe to say that most stocks have enjoyed a nice rally. In fact, of the 129 industry groups tracked by investment research firm Morningstar, 112 have delivered year-to-date gains for shareholders.

Near the top of that list stands the casino/hotel group, which has piled up an average market-cap weighted return of 54%. And of the 40 or so companies in the gaming industry, only a handful have outperformed MGMMirage (NYSE:MGM), which has climbed from below $37 to its recent $57.

Following its mega-merger with Mandalay Resorts, expectations were high for MGM at the beginning of the year. And why not? By joining forces, the combined company had become the undisputed king of the booming Las Vegas Strip, with a well-rounded property portfolio that welcomed all gamblers -- from the penny slot players at Circus Circus to the high rollers at Bellagio.

In a city known for ill-fated marriages, this union blossomed in its first full year.

Before the fall
We'll pick up in late April, when the firm topped its own targets by posting first-quarter profits of $0.49 per share on revenues that climbed 56% to $1.9 billion. The top-line growth was driven, in part, by record results at MGM's existing Strip resorts, where the company reported its 11th straight quarterly RevPAR gain.

As with the prior quarter, the modest 3% increase showed some deceleration from the steady double-digit gains the year before. However, because of recent expansion, the company had 60,000 more available room nights during the quarter, which made comparisons on a per-room basis somewhat challenging -- but helped lift overall hotel revenues sharply.

Even more encouraging, MGM was able to squeeze additional revenues out of Mandalay's former properties, as stronger occupancy led to higher casino wins and volume gains in other departments. At this point, the merger had already yielded more than $135 million in synergies.

Dog days of summer
Three months later, the company was still gaining ground, particularly at the high end of the market.

As my Foolish colleague Jeff Hwang pointed out, MGM's three heavyweight resorts -- Bellagio, Mandalay Bay, and MGM Grand -- outshined rival resorts owned by Harrah's Entertainment (NYSE:HET), Las Vegas Sands (NYSE:LVS), and Wynn Resorts (NASDAQ:WYNN). In fact, those properties earned the top three spots on the entire Strip, respectively, in terms of generating EBITDA.

From a larger perspective, though, the entire casino group was tumbling at the time, as concerns mounted that rising gas prices would discourage travel and put a crimp in discretionary consumer spending. So when the major players posted generally disappointing quarterly numbers, it only reinforced fears of a slowdown.

At MGM, overall revenues for the period climbed 9% to $1.9 billion, but with Mandalay's properties removed from the picture, same-store revenues only edged up 4%. More importantly, earnings of $0.50 per share marked a new high for the company, but Wall Street was expecting slightly more, and guidance for the upcoming quarter was somewhat on the soft side.

All of that had many shareholders cashing in their chips. In fact, less than a week after second-quarter earnings were reported, MGM shares bottomed out at $34.20, erasing all the gains for the year.

The cards begin to turn
However, as the calendar turned to fall, the firm would recoup all of those losses and then some. Part of the credit belongs to blowout third-quarter earnings, up 74% to $0.54 per share -- way better than Wall Street's targets. During the quarter, average daily room rates rose to $140 from $133, pushing RevPAR higher for the 13th straight quarter. And on the casino floor, busy baccarat tables and double-digit gains in slot revenue at Bellagio and Mandalay Bay drove revenues up a healthy 5% to $845 million.

At the same time, the shares were also swept higher by frothy speculation on the mergers and acquisition front, where Harrah's and Station Casinos (NYSE:STN) have both been caught in the crosshairs of private equity groups over the past couple months.

Harrah's could fetch a price that is reportedly near $90 per share, and the multiple implied in such a deal would reflect favorably on MGM, which not only has a foothold in Macau, but also owns more land in Las Vegas -- along with roughly half of the Strip's hotel rooms and one-third of its slots.

With all of this as a backdrop, the stock has risen about 45% over the past three months and is trading in record-setting territory.

What the crowd thinks
So, has the recent run-up stretched MGM's valuation too far, or is the company still worth exploring at this level?

According to our Motley Fool CAPS community, the stock -- rated four stars -- still has considerable upside potential, and more than nine of every 10 players who have registered an opinion believe the shares will outgain the S&P 500.

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Certainly we know where Kirk Kerkorian stands. Last month, the billionaire investor announced an offer for 15 million shares that would give his Tracinda Corp. control of two-thirds of the company -- and the shares have already gone past the proposed $55 tender price.

Going forward, MGM and Mandalay look to have a happy future together. From Project City Center in Las Vegas to Beau Rivage on the Gulf Coast to Borgata in Atlantic City to an upscale waterfront resort in Macau, the company will soon have plenty of prodigious cash flow generators.

As for now, shareholders are still enjoying the reception -- and looking forward to the honeymoon.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

How can the Fool help you spruce up your portfolio for the new year? Take a risk-free look at Stocks 2007 , our analysts' top picks for the year.

Fool contributor Nathan Slaughter owns none of the companies mentioned. The Fool has a disclosure policy.