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Why Are So Many Hedge Funds Long Sinclair Broadcast Group (SBGI)?

Sinclair Broadcast Group Inc (NASDAQ:SBGI) is the largest and most diversified TV broadcasting company in the United States, with around 173 stations in 81 different markets. In this article, we’ll take a closer look at the TV broadcaster and its future prospects. We’ll also use the latest 13F data to analyze how the hedge funds in our database positioned themselves in Sinclair Broadcast Group in the second quarter.

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 750 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

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Hedge funds are long the stock because Sinclair Broadcast Group Inc (NASDAQ:SBGI) will sell some of its TV spectrum at the FCC auction, which will restart September 13. Because TV spectrum is underutilized and can be repurposed for WIFI broadband use, analysts think the FCC spectrum auction could raise as much as $30 billion-to-$60 billion for TV broadcasters. Sinclair Broadcast Group’s management has previously estimated that the company could monetize $2 billion of its spectrum and give up only 3% or so of its broadcast cash flow. Given Sinclair Broadcast Group’s enterprise value of around $6.74 billion and market cap of $2.72 billion, any meaningful sale of broadcast spectrum could make a big difference for its stock. Hedge funds also like Sinclair Broadcast Group because the TV broadcaster is a free cash flow machine, with an expected 2016/2017 FCF yield of around 19%.

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Sinclair Broadcast Group shares have gone sideways since mid-May for several reasons. First, the FCC auction has progressed slower-than-expected and there is a probability that the auction won’t wrap up until next year.  The length of the process has denied Sinclair Broadcast Group’s stock a meaningful bullish catalyst in the short-term. Second, some sources close to its management believe that Sinclair Broadcast Group will use the auction proceeds and its organic cash flow to make accretive acquisitions, such as potentially buying the Weather Channel TV assets rather than buying back stock or paying a special dividend. Although those acquisitions could pay off in the long run, the deals won’t likely do as much for the stock in the short-term as buybacks would.

Aside from the auction’s longer-than-expected duration, there isn’t much to complain about concerning Sinclair Broadcast Group. The company reported in-line EPS of $0.52 for its second quarter on better-than-expected revenue of $666.53 million (up by 20.3% year-over-year due to the election cycle). Guidance for the third quarter was on point, with the company expecting media revenue before barter of between $649.2 million-to-$663.2 million (up by 30.3%-to-33.1% year-over-year).

In the long run, hedge funds still like Sinclair Broadcast Group’s combination of a wide moat, strong cash flow generation, and cheap valuation. Analysts at Wedbush have an ‘Outperform’ rating on the stock, with a $37 price target, $8.01 above the stock’s current price.

We’ll analyze recent hedge fund activity concerning Sinclair Broadcast Group on the next page.

In terms of overall hedge fund activity, of the 749 hedge funds that we track which filed 13F’s for the June quarter, 33 funds were long Sinclair Broadcast Group Inc (NASDAQ:SBGI) on June 30, owning $406 million worth of its shares, which accounted for 14.30% of the float. There were 42 funds with $476.06 million in SBGI holdings on March 31, so smart money has has fallen but still remains strong.

In terms of individual activity, the top shareholder of the stock in our database, Ken Griffin‘s Citadel Investment Group, raised its stake in  it by 45% during the second quarter, to 1.66 million shares at the end of June. Going the opposite way was Richard Barrera’s Roystone Capital Partners, which pared the size of its holding by 37% to 1.28 million shares during the second quarter. Carl Goldsmith and Scott Klein‘s Beach Point Capital Management also cut its holding somewhat, selling 6% of its shares. Beach Point Capital Management ended June with slightly over 792,000 shares, good for 12.77% of its equity portfolio’s value.

Disclosure: None

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