Let me begin this article with a quick discussion of my views on the economy and the stock market, which can be summed up by looking at the direction of interest rates, the yield curve, and the heavily indebted consumer. Interest rates are rising. This has a negative correlation to the stock market. Debt is becoming more expensive. This will mean lower consumer spending and lower business investment. The yield curve is flattening. If it inverts, this has historically been a pretty accurate predictor of a recession. It is logical to assume that in difficult economic times, gaming…
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Let me begin this article with a quick discussion of my views on the economy and the stock market, which can be summed up by looking at the direction of interest rates, the yield curve, and the heavily indebted consumer.
Interest rates are rising. This has a negative correlation to the stock market.
Debt is becoming more expensive. This will mean lower consumer spending and lower business investment.
The yield curve is flattening. If it inverts, this has historically been a pretty accurate predictor of a recession.
It is logical to assume that in difficult economic times, gaming and entertainment stocks would be bad investments. And in the case of the traditional gambling industry, that would be a safe assumption, as casinos have fared poorly in past recessions.
But companies that offer online gambling, like Stars Group (TSX:TSGI)(NYSE:TSG), may be less affected, as gamblers have easy, inexpensive access, and these companies have lower costs.
Apparently in the Great Depression, despite the fact that people were struggling financially, a lot of money was spent gambling and entertainment as a way to chase away the blues. Because we are dealing with human beings, this makes absolute sense.
With this phenomenon in mind, here are some other entertainment stocks to consider.
Great Canadian Gaming (TSX:GC)
Great Canadian Gaming is involved in the gaming industry — more of the casino, old-style gaming business.
It’s the type of business that would be more vulnerable to difficult economic times, although right now, the company continues to see very strong results, and Great Canadian stock is rallying big time as a result.
Great Canadian Gaming offers gambling, racetracks, entertainment, and hospitality services across gaming facilities, such as casinos and racetracks.
This is gaming for the older generations.
These facilities are operated under long-term contracts, and the industry has high barriers to entry. Revenue has increased more than 50% in the last five years and free cash flow has increased more than 26%. Great Canadian stock was up approximately 15% on the day its results were released this week, and it continues to rally at the time of writing.
Cineplex Inc. (TSX:CGX)
Cineplex stock currently offers investors a 4.83% dividend yield, strong cash flows, a steady anchor in the movie exhibition business, and a fast-growing presence in the e-gaming world.
Considering the company’s increasing diversification, its strong cash flows, and its growing presence in the e-gaming world, this entertainment stock is increasingly well positioned to capture the entertainment needs of the young and old, the millennials, and the baby boomers.
And in difficult economic times, spending on entertainment needs may be more resilient than we would expect, considering the “feel-good” effects.
So, in summary, if you expect that difficult economic times are coming soon, I would steer clear if Great Canadian Gaming in favour of Stars Group, and I would buy Cineplex.
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Fool contributor Karen Thomas has no position in any of the stocks mentioned.