Northlake is taking partial profits in Activision Blizzard (ATVI) after the shares have doubled since the initial purchase in November 2014.  The outstanding performance of ATVI against minimal change in the broader market led to position sizes up to 2X what Northlake usually targets.  Northlake still likes ATVI and sees upside to the upper $40s based on fundamental momentum in its video game publishing business.  As a result, the sales of ATVI were partial and client accounts still own a normal size position.  ATVI shares can move higher based on: (1) better than expected performance from last year’s acquisition of mobile gaming giant King, (2) continuing strong sales of the Call of Duty franchise, (3) the success of the new game, Overwatch, and (4) ongoing revenue and profit margin benefit from the transition to digital gaming revenue from packaged goods.

We are reinvesting the proceeds of the ATVI sale into MGM Resorts (MGM).  MGM is an industry leader in casino resorts with leading positons in Las Vegas, Macau, and regional markets throughout the United States.  The company is undergoing a successful restructuring that includes: (1) spinning off its real estate in a publicly traded REIT, (2) an efficiency plan that is reducing expenses throughout the enterprise, and (3) the opening of new casino resorts in Macau and Washington DC.  The benefits of each these initiatives are hitting simultaneously over the balance of 2016 and 2017 creating a series of timely catalysts to lift the shares toward our $30 target.  In addition, MGM properties in Las Vegas, by far the largest part of the company, have been performing very well.  Las Vegas is operating strongly for most casino operators with limited new hotel and casino growth and steady individual and group travel trends.  We have been following each of the major U.S. gaming companies closely for several years and are particularly impressed by MGM’s management team.

Looking ahead, the opening of the new casinos in Macau and Washington DC will allow the company to rapidly earn a payback on these very large, debt financed investments.  Improving balance sheet metrics should lead to more investors discovering the overall growth story at MGM and reduce the risk profile of the company.

We value MGM on a sum of the parts basis.  The company’s Macau business has long been publicly traded in Hong Kong.  MGM recently did an IPO of if most of its real estate into a publicly traded REIT called MGM Growth Properties (MGP).  MGP can assist MGM in certain transactions such as MGM’s recent purchase of the 50% interest in Atlantic City’s Borgata casino it did not already own.  MGP also has an excellent opportunity to pursue accretive acquisitions of casino real estate unaffiliated with MGM.  Subtracting the public value of MGM’s 76% stake in MGP and 51% stake in MGM Macau, leaves MGM’s core operations in Las Vegas and regional gaming markets around the U.S. trading at less than 8X next year’s EBITA.  We view this as compelling versus other regional casino companies and other domestic focused leisure and entertainment companies with similar or lesser growth prospects over the next several years.

ATVI and MGM are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  ATVI and MGM are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.