Gates Capital Management is a New York-based event-driven hedge fund founded by Jeffrey Gates in 1996. The hedge fund is registered with the Securities and Exchange Commission as an investment advisory firm and it advises on a group of funds for institutional and private clients worldwide. Jeffrey Gates started Gates Capital Management’s flagship fund, ECF Value Fund, in 1996 after gaining precious experience of more than 10 years in high yield bond research and sales. Gates specialized in creating and developing well-thought out investment ideas in high yield bonds and equities to mutual fund managers, hedge fund managers and other investors. According to its most recent 13F filing, the value of Gates’ public equity portfolio stands at $2.84 billion as of March 31. In this article, we will cover his favorite small-cap stocks which include Nortek Inc. (NASDAQ:NTK), Darling Ingredients Inc. (NYSE:DAR) and Gaming and Leisure Properties Inc (NASDAQ:GLPI).
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Why are we interested in the 13F filings of a select group of hedge funds? We use these filings to determine the top 15 small-cap stocks held by these elite funds based on 16 years of research that showed their top small-cap picks are much more profitable than both their large-cap stocks and the broader market as a whole. These small-cap stocks beat the S&P 500 Total Return Index by an average of nearly one percentage point per month in our backtests, which were conducted over the period of 1999 to 2012. Moreover, since the beginning of forward testing from August 2012, the strategy worked just as our research predicted, outperforming the market every year and returning 142% over the last 32 months, which is more than 84 percentage points higher than the returns of the S&P 500 ETF (SPY) (see more details).
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Gates Capital Management increased its equity holdings in Nortek Inc. (NASDAQ:NTK) to 3.22 million shares worth $284.53 million as of March 31, 2015, an increase of 44,988 shares during the first quarter and making him the largest shareholder of the company in our database. The stock has increased by 2% year-to-date despite suffering a serious slump at the beginning of May. Only a few days ago, Nortek Air Solutions LLC, which is a subsidiary of Nortek, announced the launch of its new Cool3™ indirect evaporative cooling (IDEC) unit that reduces water usage and optimizes energy savings for data center cooling. The leading manufacturer of groundbreaking custom and engineered solutions for heating, ventilating and cooling introduced this ultra-efficient technology with the lowest water usage in the industry, therefore, it is highly likely that the company will be able to boost its revenue streams in the upcoming months and years. The second-largest shareholder in Nortek Inc. (NASDAQ:NTK) from our database is Kevin Michael Ulrich and Anthony Davis’ Anchorage Advisors, owning 1.49 million shares valued at $131.73 million.
Another noteworthy move completed by Gates Capital Management was the sale of a small part of its stake in Darling Ingredients Inc. (NYSE:DAR). Gates’ hedge fund reported selling 2.85 million shares of the company during the first quarter, decreasing its stake to 14.26 million shares valued at $199.78 million. Although the stock of the company has slumped by over 13% since the beginning of the year, the share price might move higher as the company has been delivering strong financial performance lately. Specifically, Darling Ingredients reported earnings per share of $0.09 for its fiscal first quarter of 2015, beating Wall Street expectations of $0.07 per share. However, the company reported that its revenues dropped by 7.6% year-over-year to $874.69 million, failing to meet the analysts’ estimates of $900.34 million. Ricky Sandler’s Eminence Capital is the second-largest shareholder of Darling Ingredients Inc. (NYSE:DAR) in our database, owning 6.24 million shares valued at $87.48 million, trailing only Gates’ hedge fund, which was again the largest.
Gates increased his stake in Gaming and Leisure Properties Inc (NASDAQ:GLPI) to 4.88 million shares valued at $179.89 million, an increase of 953,752 shares. The stock has skyrocketed by over 25% year-to-date and there is nothing that indicates any troubles for the company along its way. There have been rumors circulating that Gaming and Leisure Properties intends to purchase the properties of Pinnacle Entertainment Inc. (NYSE:PNK), which might indicate that the company is seeking opportunities to grow and develop its current gaming facilities portfolio. As Pinnacle owns as many as 15 casinos throughout the United States, Gaming and Leisure Properties can only benefit from the above-rumored deal. Michael Novogratz’s Fortress Investment Group is indisputably the largest shareholder in Gaming and Leisure Properties Inc (NASDAQ:GLPI) in our database, holding around 10.50 million shares worth $387.16 million as of March 31.
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