Small-cap investing has high potential return for investors. However, investors should pick stocks quite carefully to minimize the risks of losing capital with small- cap stocks. Recently, Barron’s featured the ClearBridge Small Cap Growth Fund, which has around $2.2 billion in total asset under management and annual turnover of only 14%.
In the past three years, the fund delivered a sweet 26% annualized return to investors. The fund seems to be quite diversified, with the largest position accounting for only 2.5% of its total portfolio. Its top two positions are Lions Gate Entertainment Corp. (USA) (NYSE:LGF) and Bally Technologies Inc. (NYSE:BYI).
A profitable movie franchise
Lions Gate Entertainment Corp. (USA) (NYSE:LGF) is the global entertainment company with a leading position in motion picture production and TV programming and home entertainment. As such, it operates in two main business segments: Motion pictures and television production.
About $2.3 billion, or 86.3%, of total revenue was generated from the motion- pictures segment while the TV-production segment contributed only $379 million in sales. The motion-pictures segment was also the biggest profit contributor, with $396.6 million in operating income while the operating profit of the TV-production segment came in at only $24 million.
What is interesting about Lions Gate Entertainment Corp. (USA) (NYSE:LGF) is its film franchise business model. Recently, the company has been quite successful with the highly profitable Twilight franchise. In the middle of June, Moody’s also raised the company’s debt rating from B1 to Ba3, thanks to the expected impressive performance of the next three “Hunger Games.” Moody’s mentioned that the firm had “highly visible and significant free cash flows of well over $150 million per year through fiscal 2016.” Moody’s thought highly of the company’s strategic acquisition of Summit Entertainment, which brought significant strategic and cost synergies to Lions Gate Entertainment Corp. (USA) (NYSE:LGF).
Lions Gate was recently trading at $31.80 per share, with a total market cap of $4.3 billion. The market values Lions Gate Entertainment Corp. (USA) (NYSE:LGF) quite expensively at 20.1 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). In the future, Lions Gate has a high probability to grow rapidly with its movie franchise business model. However, I don’t think investors should allocate a lot of their investment capital into Lions Gate Entertainment Corp. (USA) (NYSE:LGF) due to its high valuation.
A global leading company in gaming systems
Bally Technologies Inc. (NYSE:BYI) is a diversified gaming business, selling gaming devices and technology solutions, operating in three main products: Gaming equipment, gaming operations and systems. Some $375.4 million, or 41% of the total revenue, was generated from gaming operations while gaming equipment ranked second with $310.7 million in 2012 sales.
Recently, Bally Technologies Inc. (NYSE:BYI) announced that it agreed to acquire SHFL entertainment Inc (NASDAQ:SHFL) at around $23.25 per share in cash. The total transaction value is $1.3 billion, including $8 million of debt and $41 million in cash of SHFL entertainment Inc (NASDAQ:SHFL) as of April. The deal is expected to close by June 2014.