A 13G filed with the SEC has reported that billionaire Ken Griffin’s Citadel Investment Group owns 2.8 million shares of Pinnacle Entertainment, Inc (NYSE:PNK), or nearly 5% of the total shares outstanding. Pinnacle Entertainment, Inc (NYSE:PNK) is a $1.3 billion market cap company which owns and operates casinos primarily in the Mississippi River Valley of the United States. Griffin’s Citadel has become one of the largest hedge funds in the world, and while it took heavy losses during the financial crisis a more than 20% return in 2011 brought it above its high water mark. According to our database of quarterly 13F filings, Griffin and his team had owned 1.4 million shares of Pinnacle Entertainment, Inc (NYSE:PNK) as of the end of March; the fund’s largest positions included a number of call and put options in Apple Inc. (NASDAQ:AAPL) (see more of Griffin’s stock picks).
Our research on hedge fund portfolios shows that their small and mid cap picks (stocks with market capitalizations between $1 billion and $10 billion) outperformed the S&P 500 by 10 percentage points between 1999 and 2009; the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). While we don’t recommend blindly following hedge fund purchases, we believe that they can serve as a favorable hunting ground for investors looking for initial ideas, similarly to how many individual and institutional investors use stock screens.
Pinnacle Entertainment, Inc (NYSE:PNK)’s revenue grew by 6% last quarter compared to the second quarter of 2012, with its gaming revenues growing at about the same rate as the rest of the business. However, higher costs resulted in lower operating income (the primary culprit was more spending on pre-opening and development expenses, but even adding those back operating profits fell) and Pinnacle Entertainment, Inc (NYSE:PNK) had higher interest expenses as well. Wall Street analysts expect 91 cents per share in earnings this year, which comes out to a current-year earnings multiple of 24- roughly in line with where many other casinos trade.
For some time the casino industry has been focused on Macau in an attempt to tap the growing Chinese market, placing Pinnacle Entertainment, Inc (NYSE:PNK) at something of a disadvantage relative to larger peers. It’s possible, however, that the perception gap between Pinnacle and international casino companies is narrowing as markets worry about a potential decline in Chinese growth rates. The stock price has roughly doubled in the last year. GAMCO Investors, a fund managed by billionaire Mario Gabelli, had about 690,000 shares of the stock in its portfolio according to that firm’s most recent 13F (find Gabelli’s favorite stocks).