Facing an economy devastated by 11 interest rate hikes over just 12 months, the hunt is on for S&P/ASX 200 Index (ASX: XJO) companies that can remain resilient.
Many experts tip the gaming and gambling sector as one that can see through economic downturns without much scarring.
One of those is Wilsons equity strategist Rob Crookston, who believes history is on the side of ASX gaming shares.
"Gaming revenues have historically exhibited relatively inelastic, if not countercyclical, demand characteristics," Crookston said in a memo to clients.
"This resilience can be attributed to the fact that people may continue participating in gambling activities, seeking entertainment and the possibility of winning despite financial constraints."
Even through economic slowdowns, he said, consumers will set aside some discretionary budget for gambling.
As such, Crookston named two ASX 200 stocks that he would pounce on right now:
Image source: Getty Images
'Growth in revenue and earnings throughout the economic cycle'
Lotteries licensee Lottery Corporation Ltd (ASX: TLC) has one of the most stable growth patterns seen in any ASX company.
"Despite being a discretionary purchase, lotteries have exhibited annuity-like characteristics, with the key drivers of growth being stable factors such as population growth," said Crookston.
"The Lottery Corp has achieved consistent growth in revenue and earnings throughout the economic cycle, including COVID-19."
The small outlay for consumers means lotteries remain popular through downturns. In fact, an economic slowdown might actually help sell more tickets.
That is, a lottery sells hope during tough times.
"Even during past global recessions (most recently in 2020 due to the pandemic), lottery consumption has consistently increased partly due to relatively low ticket prices," said Crookston.
"Economic downturns may prompt people to justify small-stakes gambling even as they cut back on non-essential goods and services."
Higher-margin digital sales of lottery tickets are also a growth area for Lottery Corp.
"With only ~38% of lottery sales currently online, we [believe] there is a [sizable] opportunity for further digital penetration, which should be earnings accretive given the digital sales are ~3x higher margin than the retail channel."
The business also holds a monopoly in every Australian state except for Western Australia.
The Lottery Corp share price has risen 9% so far this year.
Cyclical no more
Pokies manufacturer Aristocrat Leisure Limited (ASX: ALL) is a core holding for the Wilsons' focus portfolio.
The team is bullish after the company reinvented its charging model over the last few years.
"Previously, the business generated most of its earnings from 'one-off' outright sales of EGMs [electronic gaming machines] to casinos and other licensed venues," said Crookston.
"Nowadays, the majority of Aristocrat's revenues are recurring in nature. This has been driving strong growth in its 'gaming operations', where EGMs are leased to venues for a fee-per-day."
A big modern-day growth driver is mobile phone and social media gaming, led by subsidiary Pixel United.
"Unlike Aristocrat Gaming, Pixel United's games are completely free-to-play and are monetised largely through in-app purchases (rather than wagering) across a suite of categories including social casino (eg Cashman Casino), casual (eg Gummy Drop), and RPG, strategy & action games (eg RAID: Shadow Legends)," said Crookston.
"Pixel United has taken even more cyclicality out of Aristocrat's earnings."
Investors sure have taken notice of Aristocrat's potential recently. The share price is 25% higher now than where it started 2023.
