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Buying Lottery Stocks in the Wall Street Casino

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Playing the lottery is not generally considered to be the world's wisest investment, and usually doesn't count as responsible retirement planning. But, although sales of lottery tickets fell 0.9% in FY 2009 year-over-year, Americans still bought $52.3 billion of them, according to Census Bureau data reviewed by Bloomberg.

While some of that money was used by various states for education and other public purposes, the only other real winners in the lottery world can be the companies that manufacture the tickets.

There are three primary firms in this business:

* Scientific Games (SGMS)

* GTECH Holdings, which is now part of Lottomatica S.p.A. (LTO), which trades on the Borsa Italiana

* Pollard Banknote (PBL), which trades on the Toronto Stock Exchange

"We supply instant tickets to 43 of the 44 U.S. jurisdictions that currently sell instant lottery tickets, and we sell instant tickets and/or related services to lotteries in over 50 other countries," the Scientific Games website says. "We operate six printing facilities across five continents and have the capacity to print in excess of 50 billion 2’’ x 4’’ standard instant ticket units annually. We believe that our extensive service offerings, coupled with our innovative products and extensive library of licensed properties, enable us to effectively support lotteries in increasing their retail sales of instant tickets.

"The growth of Scientific Games was built principally on instant lottery tickets and the company’s ability to deliver those so-very-popular scratch cards creatively, quickly and securely.  Today, Scientific Games is the foremost producer of instant tickets in the world."

GTECH has apparently carved out its own niche in the instant-win (and I use the word "win" extremely loosely in this case) market:

"As a global leader in the world's online lottery business, the name GTECH is synonymous with the industry it pioneered and helped to build. GTECH is a full service technology partner catering to all of the systems and support needs of online lottery operators worldwide," GTECH'S website says. "This comes from the Company's ability to analyze the specific needs of each customer and to design solutions that meet the widest array of operating requirements."

"Online lottery operators worldwide" include the government of Madagascar, which has just partnered with GTECH to run theirs.

And Manitoba, Canada's Pollard Banknote (PBL on the Toronto Stock Exchange) supplies over 45 lotteries with scratch-off tickets, including a number of licensed properties, like this one featuring Dean Martin:

Obviously, in this industry, security is of paramount importance. Pollard Banknote writes:

"In producing billions of secure lottery tickets annually, we have set up many safeguards to ensure a secure environment. These protocols govern our efforts in printing plate production, game data programming, imaging, and all additional aspects of game production. Only authorized personnel, all of whom are fully aware of the importance of maintaining a secure workplace, can access these and other production-critical zones.

"Tickets must be secure before they reach the market. This drives us to take great care in accepting raw materials, designing tickets, and inspecting the final product. Our in-house security labs test and fortify tickets to withstand ever-changing invasion tactics. Features are integrated into a ticket’s construction to ensure that it isn’t susceptible to the following means of invasion: microscopic examinations, microsurgery examinations, attempts to lift and replace latex using various adhesive tapes, electrostatic tampering, infrared light and video after exposure to caustic chemicals, and a host of other known and emerging threats. As well, Pollard Banknote incorporates ticket features making its products capable of withstanding exposure to water, humidity, chemicals, and temperature-controlled chemical vapors."

Who woulda thunk it? Well, it seems that there actually are ways to beat the scratch-off at its own game.

According to the Toronto Star, "statistician Mohan Srivastava...discovered a way the tickets could be decoded to predict a winner on the game 'Tic Tac Toe'" in 2003.

"Srivastava would look at the numbers on the ticket, and if a sequence of numbers was lined up in tic-tac-toe fashion and were not repeated anywhere else on the ticket, it was likely a winner.

"'If someone explained the trick to you, I think, I actually know, a child could do it,'" Srivastava said.

"He contacted the OLG (Ontario Lottery & Gaming) about the trend, and while the corporation recalled unsold tickets of the game, it never went public with the information."

This raises the question of whether or not scratch-off lotteries are truly randomized. Common sense would dictate that, since there are a fixed number of prizes and payouts, it, by nature, cannot be--which is why lotteries are required to post public notices when prizes are claimed and to pull all remaining tickets after the grand prize has been won.

Otherwise, people would be buying tickets that have literally no chance of winning, not just no actual chance of winning in this lifetime.

In 2008, CNN reported:

"USA Today estimates that about half of the 42 states that have lotteries were, as of early July, continuing to sell tickets after the top prizes are claimed. Lottery officials from some states say the practice is fair because lesser prizes are still available, and they say tickets and lottery Web sites make that clear.

"In New Jersey, tickets for the "$1,000,000 Explosion" scratch-off game were still on sale last week, even though the million-dollar grand prize was already awarded.

"Lottery ticket buyers outside a New Jersey convenience store were stunned to hear the news.

"'Oh really? I didn't know that,'" one shopper told CNN. Another added, "'That's just not right.'"

Fortunately, the states actually do move pretty quickly to get "dead" scratchers off the market. Because, as Marc Fisher commented in the Washington Post, "It's admittedly a bit far-fetched to expect that your average scratch-off card buyer--an impulse buy if there ever were one--to first check in on the lottery's web page to see which games still have the most prizes extant."

Oh, and that silver stuff you scratch off on the ticket itself? It's latex.


POSITION:  No positions in stocks mentioned.