Remember when Macau was the only thing the casinos had to look forward to in terms of growth? My, how quickly things can change.

It was only a couple of years ago that China’s gambling enclave was growing its casinos’ revenue at a 70% (annualized) clip, which is why all the big U.S. names like Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), and MGM Resorts (NYSE:MGM) were falling over themselves to plant their flag in the 20th century’s Las Vegas.

In a cruel twist of fate, the pace of Macau’s gambling growth has slowed nearly every month for the past 18 months, falling to a mere 11% pace as of the end of May. Stocks of all three companies have plunged as much as 30% during the past three months, as the worries over waning revenues overseas have become reality, via earnings misses.

Of course, it’s not like the purely domestic casino operators’ stocks have fared better. Shares of Boyd Gaming (NYSE:BYD) and Penn National Gaming (NASDAQ:PENN) also are off by as much as 30%, as their bottom lines fell short of hopes for last quarter.

It all begs one question: Is the era of “casinos being recession-proof” now over? Said another way: Is the market making the right call by trashing these stocks?

The Con Case

First and foremost, casinos aren’t the recession-proof business ventures they’re touted to be — nor have they been in years.

But you see, before 2001, we just hadn’t seen a real, hard-hitting recession in more than a decade (1990 was the most recent one at the time) to test the theory. However, in 2001 — and even more so in 2008 — recessions took a measurable toll on gambling revenue.

How’d that happen? Two words: Times change.

Thirty years ago, a Las Vegas casino was just a casino. The hotels and food were only there to facilitate guests bringing their money to (usually) lose to the house. The industry catered to gambling addicts and didn’t have to compete with lotteries, online poker and a million other modern-day distractions.

Now, the food, hotels and shows at these venues are as much of a draw as the gambling itself. Problem is, while gambling might be recession-resilient, all the other things that feed gambling profits are not recession-resistant. That’s why Q2’s weakening earnings numbers have taken a big toll on gambling stocks — fading growth and missed expectations might be an omen that a recession really is around the corner — and that will take a big bite out of casino companies’ profits.

The Pro Case

On the flipside, what if last quarter’s challenged results from casinos and other gambling stocks weren’t the result of a budding recession, but just a little bad luck? Then the market overdid it by selling these equities with extreme prejudice.

It wouldn’t be the first time the market saw something that wasn’t there, and you don’t even have to look too far back to see it.

While the past three months might have been decisively lousy for shares of Las Vegas Sands, Wynn Resorts and Melco Crown Entertainment (NASDAQ:MPEL), that weakness actually is part of a much bigger trend — of stagnation.

Those three stocks, along with most others in the business, are at or below levels where they ended 2010. While the gambling industry saw the same recovery other industries did in 2009, by 2010, investors began to have their doubts that casinos would every really recover. Big mistake. The past 12 months have been Melco’s most profitable ever. The same goes for Las Vegas Sands. Wynn is close to record profits, as are a bunch of other names in the group.

The reason: While Macau’s growth rate is slowing, growth still is growth. Remember, in 2010, Macau was becoming something out of nothing; any growth is going to look huge in that situation. Now that Macau is all grown up, it’s putting up growth numbers that are — gasp! — just OK.

And the Verdict Is …

In my experience, things rarely turn out as well or as poorly as the extreme outlooks would have you expecting. Translation: Casino companies aren’t minting money for shareholders, but they’re not going to hell in a handbasket, either.

The fact of the matter is, while Macau’s growth rate is slowing, it’s still growing despite recessionary fears in China. Las Vegas’ foot traffic and gambling revenue, though lackluster last quarter, still are in a longer-term uptrend. Yet, the market just hammered these names like it did last year — an overreaction that has created a lot of value as a result. Las Vegas Sands is now trading at a forward-looking P/E of 12.4, while Melco Crown — my pick of the litter — is only priced at 12.1 times its forward-looking income.

There are a ton of bargains outside the casino group, but still in the gambling space, too. One of them is International Gaming Technology (NYSE:IGT), a gaming equipment maker, which is priced at a mere 9.4 times its expected future earnings. Crazy!

Bottom line? The market is killing these stocks based on the worst-case “con” scenario. But we’re not quite headed into a global recession yet. I suspect six months from now when these outfits continue to do pretty well, the underlying stocks will be telling a much different story than the ones they’ve told during the past three months.

It pays to be in the minority.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.