MGM Resorts International (NYSE:MGM) spiked by 9% in Tuesday intraday trading after investor Land and Buildings issued a presentation on the company in which it suggested a spin-off of the company’s real estate assets into a REIT. Among other things, the investor suggested that the company’s real estate assets alone have a value of $25 per share, which is significantly above the current price of the stock. If the investor succeeds in its campaign, other shareholders of MGM Resorts International (NYSE:MGM) will also benefit from this move. So far, one of the funds that has been betting big on MGM resorts is Jason Adler‘s AlphaBet Management, which owns 979,000 shares, the $20.93 million stake being the third-largest in the fund’s equity portfolio.
Land and Buildings considers that if MGM pursues a REIT status for its parent company, conducts a free spin-off of lodging C-Corp and reduces leverage through asset sales and MGM China special dividend, it could unlock a 70% upside in its net asset value. In this way, the base net asset value of the company could amount to $33 per share, while in the bull case, the company’s stock could grow to as much as $55 per share. The move would follow the same strategy adopted by Penn National Gaming, Inc (NASDAQ:PENN) and, more recently, by Pinnacle Entertainment, Inc (NYSE:PNK), which is up by 57% since the beginning of the year, amid plans to spin-off its real estate assets into a REIT.
Aside from AlphaBet Management, Robert Hockett’s Covalent Capital Partners is another shareholder bullish on MGM Resorts International (NYSE:MGM), holding 1.96 million shares of the company, the $41.82 million holding being the second-largest in the fund’s equity portfolio. In addition, Ken Griffin’s Citadel Investment Group raised its stake by 5.92 million shares during the fourth quarter to 6.29 million shares.
AlphaBet Management holds around $316.2 million in equities, which represents a significant decrease from over $1.20 billion held a couple of years ago. The fund invests in services and technologies, and has a lot of exposure to casino and resorts operators, which can be seen from the fund’s largest stakes, which aside from MGM Resorts International (NYSE:MGM) also include Wynn Resorts, Limited (NASDAQ:WYNN), and Las Vegas Sands Corp. (NYSE:LVS).
Even though AlphaBet’s equity portfolio is relatively small, compared to other investors, the fund still prefers to invest in large-cap stocks, following the trend of most hedge funds, among over 700 that we track. However, this strategy may not be so efficient. Our backtests of an equally-weighted portfolio comprising 50 most popular picks among hedge funds generated a monthly alpha of 6 basis points between 1999 and 2012. In addition, this portfolio underperformed the market by 7 basis points during this period. This underperformance can be explained by the fact that large-cap companies are priced efficiently, therefore can’t provide opportunities for unlocking value that could generate high returns. On the other hand, small-cap stocks have a better chance to appreciate significantly, which is also proven by our small-cap hedge fund strategy, which returned 132% between August 2012 and March 2015 and beat the the market by 79 percentage points.
