The Big Bet That Could Propel Casino Stocks

Casino stocks are having a terrific week—and it has nothing to do with Las Vegas. In fact, it has everything to do with the coastal Chinese city of Macau.

In general, U.S. stocks have massively outperformed equities from the rest of the world. Just check out this jarring chart comparing the Shanghai Composite to the S&P 500:

But when it comes to gaming stocks, lady luck is on Asia's side. In a stock-boosting report published on Tuesday, RBC analyst John Kempf upped his earnings estimates on four stocks—Las Vegas Sands, Wynn Resorts, Melco Crown, and MGM Resorts— due to higher Macau expectations.

"The Chinese middle class continues to grow and continues to use their leisure dollars to go to Macau," Kempf explained. "The infrastructure in Macau is improving, and the city has added hotels rooms, making it easier for gamblers to stay the night."

Meanwhile, the news for U.S. casinos has been anything but bullish. On Monday, Atlantic City's Revel, a $2.4 billion project, filed for bankruptcy protection and said that it was worth no more than $240 million.

(Read More: Atlantic City's Revel Casino Files for Bankruptcy)

The MGM Macau casino resort, in Macau, China.
Lam Yik Fei | Bloomberg | Getty Images
The MGM Macau casino resort, in Macau, China.

So it's no surprise Kempf's favorite picks are those that are the most exposed to Macau and least vulnerable to the bumpy road for casinos in the United States. "The best way to play Macau is through Las Vegas Sands and Melco Crown, and that's essentially because most of their EBITDA [earnings before interest, taxes, depreciation and amortization] is coming from Macau."

However, Harold Vogel, a money manager and an expert on the entertainment and travel industries, doesn't think there's much fruit left on the Macau vine.

"Macau depends on China, and China is running on empty," Vogel said."And because of that, the prospect for existing casinos in Macau are under question. Beyond nine months or a year's time, I don't think it's easy to predict anything on the upside."

(Read More: New Jersey Approves Online Gambling: 3 Stocks to Benefit)

And Vogel sees even more reasons to take money off the table. "In Macau, new competition is being planned. If the market doesn't expand accordingly, each casino will have a lower share," he said. Not only that, but "you have to hope that casinos in the Philippines and Singapore won't take away business." For all these reasons, Vogel said that the Macau growth cannot be sustained.

But Kempf points to simple mathematics. "It's just supply and demand. You have a country with over a billion people. And just one little enclave, basically, where you can gamble in Asia, and that's Macau."

The real question, perhaps, is whether Macau will be able to hold on to that total dominance.

—By CNBC's Alex Rosenberg

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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