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

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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

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