Nortek Inc (NTK): Gates Capital Management Increases its Stake to Over 20%

Jeffrey Gates’ Gates Capital Management is strengthening its stake in Nortek Inc (NASDAQ:NTK). According to a recent filing with the Securities and Exchange Commission (SEC), the fund purchased over 150,000 shares to take its total holding in the company to over 3.22 million shares. With this purchase, Gates Capital Management now owns over 20% of all common stock of Nortek Inc (NASDAQ:NTK), though the stake is passive by nature.

Gates is placing a big bet on Nortek Inc (NASDAQ:NTK), which currently constitutes around 8% of the fund’s equity portfolio. The fund initiated its position in Nortek Inc (NASDAQ:NTK) during the last quarter of 2011, since then the stock is up over 250%. Gates Capital Management is an event-driven fund that tries to find ‘dislocation event’ at public companies which are creating substantial value and cash flow. Other major holdings of the fund include Darling Ingredients Inc (NYSE:DAR), shares of which are down almost 20% year over year, but up more than 130% in the last five years, and Rockwood Holdings, Inc. (NYSE:ROC), which is up over 10% year over year.

Joshua Friedman and Mitchell Julis’ Canyon Capital Advisors is another major investor in the company, which as of June 30, 2014, owns over 1.2 million shares. Edward A. Mule’s Silver Point Capital increased its stake in the company by 214% to 550,000 shares during the second quarter.

In a recent filing with the SEC, Nortek Inc (NASDAQ:NTK) mentioned that for the fiscal year ending on December 31, 2014 it expects net sales to be in the range of $2.45 – $2.5 billion and adjusted EBITDA to be in the range of $265- $273 million. For the last fiscal year, the company had reported adjusted EBITDA of around $129 million and revenue of $2.288 billion. The company declared a negative EPS of $2.97 for the second quarter of 2014, versus an EPS of $0.73 in the same period last year. The company trades at 18 times its forward earnings.

On October 8, Nortek Inc (NASDAQ:NTK) announced acquisition of HVAC distribution business of privately owned Phoenix Wholesale, Inc. The company expects this transaction to generate incremental revenue in the range of $15 million to $20 million in the next 12 months. Most analysts and brokerages are optimistic about the stock. It has an average recommendation ‘Overweight’ and an average price target of around $91.5. Imperial Capital has recently initiated coverage on Nortek Inc (NASDAQ:NTK), setting ‘In-line’ rating.

Academic research on trading activity by hedge funds has shown that when they continuously increase their stake it a company, it outperforms its peers by a wide margin in the near future. Though regular investors can’t boast of the resources at disposal of hedge funds, by following the activity of proven hedge funds, they can surely emulate the returns generated by these funds and that too at a much cheaper cost.

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