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.
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).
Larger players in the casino industry include Las Vegas Sands Corp. (NYSE:LVS) and Wynn Resorts, Limited (NASDAQ:WYNN). These two stocks carry trailing earnings multiples in the 24-25 range, which as we’ve mentioned is similar to Pinnacle’s valuation based on analyst consensus for this year. Wynn, similarly to Pinnacle, recorded an increase in revenue in its most recent quarter compared to the same period in the previous year but this was offset by higher costs leading to a small decline in earnings (profits are up year to date, however, due to a good Q1). It should also be noted that Wynn pays shareholders a dividend yield of slightly more than 3% at current prices. Las Vegas Sands has been aggressively expanding into Macau with new casinos over the last few years, and this has helped fuel double-digit revenue growth rates and large percentage increases in profits. Surely some of these increases will be short lived but it may be worth looking into how much future growth might be expected for investors who are comfortable with or even want the Chinese exposure.
Weighing Pinnacle against other casinos is a question of geography- whether Macau or non-Vegas American locations are more desirable for future earnings- and a question of how much the company can improve in the future. Current financial performance has been weak enough that we would prefer to wait for better results from the company before considering it at the current valuation.
Disclosure: I own no shares of any stocks mentioned in this article.
