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Scientific Games Corp (SGMS): Park West’s Stake Surges; See Fund’s Other Top Picks

As a new filing with the Securities and Exchange Commission showed, Peter S. Park‘s Park West Asset Management has boosted its stake in Scientific Games Corp (NASDAQ:SGMS) to 5.67 million class A shares from 650,000 shares. Following the increase, the fund’s passive stake amasses 6.6% of shares of the small-cap developer of products for the gambling market.

Scientific Games Corp

The move disclosed earlier today comes at the same time as an announcement was made by the company. Scientific Games Corp (NASDAQ:SGMS) said in a statement that it will provide several systems and games products for the El San Juan Resort & Casino. The products will be provided by Bally Technologies, a company that Scientific Games Corp bought last year for about $3.3 billion.

As Scientific Games Corp (NASDAQ:SGMS) is a small-cap company, the interest from investors is also relatively small. Among more than 700 funds that we track, 26 investors reported holding in aggregate some $373.10 million worth of stock in the latest round of 13F filings. However, the company gained more popularity during the last three months of 2014, as previously the number of funds holding shares amounted to 21, and the aggregate value of their positions was at $249.07 million at the end of September.

The increase in popularity is not surprising, since the merger with Bally Technologies was expected to generate $220 million in cost synergies and $25 million in capital expenditure savings. However, for the last 52 weeks, the stock of Scientific Games Corp (NASDAQ:SGMS) lost 28%, significantly underperforming the gambling industry, which inched up by 7% during the same period. The company also posted a net loss of $2.77 per share for the last year, versus $0.36 a year earlier, although its revenue surged to $1.79 billion from $1.09 billion.

Among the funds that we track, the largest stake in Scientific Games is held by Debra Fine’s Fine Capital Partners, which in its latest 13F filing disclosed holding 8.21 million shares (the stake was valued at $104.49 million and was the third-largest in the fund’s equity portfolio). A bunch of other funds also disclosed substantial positions in the company that amass over 1.5% of their equity portfolios.

It is important to see the sentiment of hedge funds regarding Scientific Games Corp (NASDAQ:SGMS), because it’s a small-cap company and therefore falls under the category of stocks that we are interested in at Insider Monkey. We have determined through backtests that a portfolio of the 50 most popular stocks among hedge funds (generally large- and mega-cap companies) underperformed the market by approximately 7 basis points per month between 1999 and 2012. On the other hand, a portfolio consisting of the 15 most popular picks from the small-cap segment beat the market by nearly one percentage point per month in the same backtests. Inspired by the performance of these backtests, the founder of Insider Monkey, Dr. Ian Dogan developed a system that we have been sharing in newsletters for the last 2.5 years (read more details here). During this period, this strategy posted gains of some 132%, beating the S&P 500 ETF (SPY) by around 79 percentage points.

In line with our strategy, it is important to follow the activity of hedge funds that have a lot of exposure to the small-cap space. Park West Asset Management is one of these funds, since it holds a relatively small equity portfolio valued at around $630 million as of the end of 2014, and four of its five largest holdings are represented by small-cap companies. The fund is also very diversified, holding 40 long positions spread across the Services, Technologies, Basic Materials and other sectors. Let’s take a closer look at Park West’s three largest holdings in terms of value from the fund’s latest 13F filing

Shutterfly, Inc. (NASDAQ:SFLY) is on the first spot, with Park West disclosing a $45.82 million stake that contains close to 1.1 million shares. The position amasses 7.26% of the fund’s equity portfolio and was increased by 23% during the fourth quarter of 2014. Shutterfly is a $1.70 billion personal services retailer that provides a range of personalized products and services offered through several lifestyle brands. The company is currently targeted by an activist investor, Mario Cibelli of Marathon Partners, who holds a 5.45% stake. Marathon Partners has been a long-term shareholder of Shutterfly, Inc. (NASDAQ:SFLY) and recently issued a letter sent to the company’s board of directors in which it stated that it seeks board representation in order to address the “lack of incentives encouraging long-term stock ownership by executives,” some excessive compensations that are based on revenue and EBITDA growth, instead of other metrics that are more related to the shareholder value of the company (free cash flow, or earnings per share). Among the funds that we track, the largest shareholder with a long-position in Shutterfly, Inc. (NASDAQ:SFLY) is Steven Cohen‘s Point72 Asset Management, which owns 2.32 million shares as of the end of 2014.

In ShoreTel Inc (NASDAQ:SHOR), Park West owns 5.56 million shares, down by 11% over the quarter, the value of the stake amounting to $40.90 million. The investor initiated a stake in the $422 million market-cap company during the third quarter of 2013 and has seen the stock appreciate by around 8% since the end of September 2013. ShoreTel Inc (NASDAQ:SHOR) is engaged in providing business communication solutions, and over the last year as its stock fell by 20%, it has underperformed the communication equipment industry, which returned 8% during the same period. Moreover, the company has posted revenue growth for the last several years and its net loss has been narrowing. For 2014, the revenue amounted to $340 million versus $314 million a year earlier and its net loss narrowed to $0.02 from $0.44. Among over 700 funds that we track, Park West is the largest shareholder of ShoreTel Inc (NASDAQ:SHOR), followed by Robert G. Moses’ RGM Capital, which owns 4.64 million shares.

Park West’s third largest holding is not represented by a small-cap company as opposed to the previous two positions. The fund disclosed holding approximately 513,400 shares of Macquarie Infrastructure Company LLC (NYSE:MIC), the value of the stake amounting to $36.50 million. Macquire Infrastructure pays a quarterly dividend of $1.50, which gives its stock a yield of 2.06%. Based on these metrics and also on the popularity of the company among the funds that we track, Macquarie Infrastructure Company LLC (NYSE:MIC) was one of the most popular dividend stocks, with 64 funds disclosing ownership of $2.0 billion worth of stock. Macquarie Infrastructure Company LLC (NYSE:MIC), which is a $5.8 billion provider of airport and air services, is also included in the equity portfolio of activist investor Mick McGuire’s Marcato Capital Management, which disclosed holding 3.87 million shares in its latest 13F filing.

Disclosure: None