Place your bets for the US gambling boom

America has always had a conflicted attitude towards gambling. Casino cities such as Las Vegas and Reno in Nevada and Atlantic City in New Jersey have become world famous. The image of Vegas as the ultimate hedonistic retreat is a staple of Western popular culture, while the award-winning television series Boardwalk Empire is based on the rise of Atlantic City (though gambling was only legalised there in 1976).

Gambling also makes a significant contribution to the US economy. The American Gaming Association claims casinos alone generated $125bn in 2010, or 1% of GDP.

Yet the free-wheeling attitude in Vegas contrasts with a far more censorious approach elsewhere in the country. Even today, casinos are banned in a majority of American states, or only permitted to operate in small, specific areas. Slot machines, poker and off-racetrack betting are all similarly restricted.

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In 2006, a shock decision effectively to ban online gambling at a national level sent the shares of online gaming firms diving and led to the arrest of two British online gaming executives, Peter Dicks and David Carruthers.

But times are changing. Recession and poor planning has left many American cities and states with large deficits (they're spending more than they raise in taxes each year) on top of already-huge debts. Faced with the need to raise money quickly, many are now relaxing restrictions on slot machines and even allowing casinos to open. A similar shift is happening online. Just over a year ago, the US government relaxed the rules on forms of online gambling that don't involve sports betting.

This has created opportunities in three key areas. Operators of existing casinos are poised to expand across the nation. This in turn is creating demand for firms that help casinos with security and ensure that gamblers spend the maximum amount of money possible casino support services. Finally, the change of attitude towards online gambling is good news for existing companies looking to launch in America.

Traditional casinos

Maryland is just one US state that has radically changed its policies towards all forms of gambling. Casinos were first given the go-ahead in 2007, but were restricted to slot machines. But at the end of last year, residents voted to remove these restrictions in a referendum. As a result, in the very near future there will be six full-service casinos within easy reach of the nine million inhabitants of Baltimore and Washington DC.

An even more significant shift is taking place in New York state. Other than a handful of casinos run by Native Americans, New Yorkers have had to drive to Atlantic City, or nearby states such as Connecticut, for their gambling fix. But 18 months ago, a 'racino' attached to a racetrack opened within New York city itself.

While it is limited to electronic gambling games, it may be just the start of a bigger shift. Legislation is close to being passed that would allow up to seven commercial casinos to operate in the state, with the possibility of more to come.

For political reasons, many will be located in the less populated upstate area. However, legislators have hinted heavily that at least one will be located in the state capital, offering unrestricted gambling.

Hand in hand with the recent boom in commercial casinos, there has been an even greater expansion in gambling run by Native American tribes. Because of the special legal status of tribal lands, Native Americans have always had much greater autonomy when it comes to offering gambling on their own land.

But in recent years they have been exploiting this opportunity far more aggressively. There were only 87 such casinos in 2001 by 2011 that had grown to 459, according to the American Gaming Association. Several tribes have also opened casinos beyond their lands and big businesses are increasingly keen to partner with them. In 2008, for example, national casino chain MGM Resorts opened a $700m casino in Connecticut in a joint venture with the Mashantucket Pequot tribe.

Support services

The boom in casino numbers coincides with rapid growth in the technology and support services needed to run them. Twenty years ago, casino management was based on gut instinct. Today, everything from security to customer management employs the latest technology.

The chief concern is security. Millions of dollars fly around the gaming tables every day. The threat from conmen, criminal gangs and opportunistic thieves is serious and constant, from sophisticated schemes involving marked cards, to players simply stealing chips. One of the biggest scams involved fraudsters using false identities to run up huge debts. By the time it ended in 2000, it netted the gang, known as the Roselli Brothers', an estimated $37m.

But it's not just outright fraudsters who keep casinos awake. While all casino games favour the house, a few are beatable in certain circumstances. Those dedicated enough to keep track of every card (card counters) can gain an advantage in blackjack, a major revenue generator.

As the 2008 film, 21, documents, from the late 1970s to 2000 successive groups of students from the elite Massachusetts Institute of Technology made millions by exploiting this strategy. To prevent customers exploiting this or any other kind of edge', casinos spend huge sums every year on surveillance.

The latest technology scans everything from licence plates to faces to identify troublesome individuals who then can be barred from the tables before they begin to threaten the casino's bottom line.

TableEye21, the most sophisticated of these tools, combines image recognition with radio frequency identification technology to track how a player is doing and the strategies he or she is following.

The industry has even adapted a data mining technology, known as non-obvious relationship awareness (Nora). This can automatically cross-check player lists against databases in seconds to see if two supposedly unrelated individuals have anything in common such as a shared residence, university, or even a tendency to play at the same table which might suggest they are part of a group.

The system has been so successful that developers Systems Research & Development has adapted it for use in counter-terrorism and for helping banks and insurers reduce fraud.

As well as getting rid of undesirables who might actually be able to win some money, casinos are using software to identify their most profitable customers. Currently players can sign up for reward cards, similar to supermarket loyalty cards, that give them discounts on food and hotel rooms. The casino then uses this data to tailor rewards to individuals.

However, Bally Technologies, which is at the forefront of helping casinos fine-tune these systems, has hinted that in the near future they may be able to do away with these cards altogether, instead using facial recognition to keep track of players.

Casino support services aren't just about keeping tabs on customers: there are also the games themselves. The popular idea of a casino involves James Bond-types brooding and bluffing over blackjack tables. In reality, lines of portly tourists with cups full of loose change form the backbone of the business: almost 75% of the average casino's revenues come from slot machines.

The more sophisticated these become, the more they can persuade customers to spend. The current trend is for games that incorporate tiny elements of skill: these have a minimal impact on the outcome, but they convince customers to linger longer and spend more.

For instance, Big Buck Hunter', by International Game Technologies, allows the user to choose between the spins common on slot machines, or a duck-hunting game. The latest generation of models also allows casinos to tailor the games, including their themes and payout rates, to individual players, using data from loyalty cards.

The return of online gambling

When online gambling first started to take off in the late 1990s, the big Vegas casinos pushed for government action, worried it would eat into their profits. Now they're switching sides, hoping their big brands and years of expertise will help them grab a share of the market.

Caesars Entertainment (formerly known as Harrah's) was the first to break ranks, launching a site aimed at the British market. It's now launching an online poker site that will let US players take part. This takes advantage of a 2011 decision by the state of Nevada to allow online poker.

While this was limited to residents of Nevada (the US government is responsible for interstate commerce), it was followed by Delaware's decision to legalise online casino games. Most significantly, New Jersey governor Chris Christie has said he is willing to trial a limited liberalisation in his state, raising hopes that Atlantic City could become "the Silicon Valley of online gaming", as one of his supporters put it.

However, even as money starts to flow back to the web, the traditional model of bettors logging onto a website is being overtaken by a new approach based around social media. One of the hottest trends in video gaming has been the rise of Facebook apps that let those browsing the network play simple, yet addictive games. Gambling firms are adapting this by developing games that allow users to play virtual slot machines and bingo.

For now, these Facebook-based games don't use real money. But they provide a powerful advertisement for the websites of the gaming firms that run them. Gaming website 888.com has also agreed a deal with Facebook that will let British users of the site use their credit cards to gamble.

Other firms are expressing an interest in this trial. Foremost is Zynga, developer of the cult game FarmVille, which has partnered with online poker firm Bwin.party. It aims to launch its service in 2013. Like the 888.com deal, it will initially only be available to UK consumers.

But Zygna has applied for a gaming licence in Nevada, a sign that it intends to roll this service out to consumers in America. We look at the best way to profit from this and other trends below.

Has Macau lost its winning touch?

One of the biggest stories in the global casino industry has been the meteoric rise of Macau. The former Portuguese colony has benefited from its status as a Special Administrative Region of China. This has allowed it to escape the Chinese ban on casino gambling, while its proximity to the mainland attracts huge numbers of wealthy gamblers.

As a result, several US casino firms, including MGM, have invested in the island. According to official statistics, casino revenues came in at $38bn last year, which makes it bigger than the entire American industry.

However, there are signs that the boom may be over. China's slowing economy has reduced the amount of cash around to wager: the latest figures suggest spending is down year-on-year. There are also concerns that lax regulation has turned the industry into a haven for money laundering and organised crime.

There have been a number of high-profile arrests of gamblers and casino officials in recent months. In October, Caesars Entertainment pulled out of Macau, abandoning an attempt to turn a golf course it had acquired into a casino. So for now, we'd rather invest in the American casino revival.

The stocks to buy now

Pinnacle Entertainment (NYSE: PNK) is set to benefit from the spread of casinos across America. It is currently buying Ameristar Casinos (Nasdaq: ASCA). This deal will turn Pinnacle into a major regional chain, with 15 casinos (and two racetracks) in nine states, none of them in Las Vegas.

While the acquisition will increase its debt, it will still be less highly levered than its major rivals. It's on a forward price/earnings (p/e) ratio of 15.

Many companies provide equipment and services to the casino industry. However, few are as diversified as Bally Technologies (NYSE: BYI), which makes everything from slot machines to systems that track player behaviour. Strong sales growth and rising margins saw income jump by 18% over the last year.

JP Morgan expects Bally to keep growing strongly in the short-to-medium term, while keeping costs down through strong inventory management. It trades on a 13.5 forward p/e.

Scientific Games Corporation (Nasdaq: SGMS) offers support and security services for lotteries around the world. Its expertise means it will be in a prime position to win the rights to run lotteries, if US state governments go through with plans to either subcontract their management to the private sector, or privatise them entirely.

If you want to focus on security exclusively, consider NICE Systems (Nasdaq: NICE). The Israeli company develops surveillance and anti-fraud system for a wide range of industries. Its technology, which allows casinos to improve the quality of their video recordings while still storing them cheaply, is used in over 180 casinos worldwide. It is also developing software that can analyse unstructured data, such as images and voice recordings.

As for online gaming, we tipped William Hill (LSE: WMH) in November. It is up more than 20% since, partly due to a positive trading update, which showed strong growth at its online business. Prospects remain good, but it's certainly more expensive than when we tipped it. So now could be a good time to take some profits.

A better option is Gibraltar-based 888 Holdings (LSE: 888). A well-established provider of online poker and casino games to British gamblers, it is taking steps to expand into the US, agreeing a deal with casino giant Caesars.

As well as providing brand name recognition, partnering with such a well-known American group should lower the regulatory risks. Its Facebook tie-in also gives it first-mover advantage in this growing area. It looks attractive on a forward p/e of 10.3.

A riskier option is Betfair (LSE: BET). The online betting firms' shares have more than halved in the two and a half years since its initial public offering (IPO). However, its role as the largest sports betting exchange means it could benefit hugely if America decides to allow online sports betting.

It is already trying to get the American horseracing industry to throw its weight behind its betting exchange model. While this could take time, the company has been slashing costs and is trying to increase growth in its core British market.

Other online firms that have gained in the wake of Chris Christie's announcement are Bwin.party Digital Entertainment, Sportech and Playtech (LSE: PTEC). Playtech offers the most value. According to Panmure Gordon, it has "faster growth, higher margins and lower risk exposure to online gaming than its peers", yet still trades on a forward p/e of 9.8.