Caesars Entertainment Among Hedge Funds’ Favorite Stocks

Posted on: August 7, 2023, 10:55h. 

Last updated on: August 7, 2023, 11:51h.

Shares of Caesars Entertainment (NASDAQ: CZR) are higher by 36.45% year to date, and that’s good news for all investors, including the slew of hedge funds that are long on the stock.

Caesars hedge funds
Visitors entering Caesars Palace Las Vegas. The operator’s stock is a hedge fund favorite. (Image: David Paul Morris/Bloomberg)

Recent data released to clients by Bank of America indicates Caesars has a net relative hedge fund to S&P 500 weight of 10.38, a tally exceeded by just nine other stocks. That puts the Harrah’s operator on the top 20 list of equities most favored by hedge funds. It’s also the only gaming name in that group.

We analyze hedge fund managers’ positioning in the S&P 500 stocks by aggregating their long positions reported through the 13F filings, and by estimating their short positions based on exchange-reported data,” wrote Bank of America equity strategist Savita Subramanian in a report. “We estimate that hedge funds account for 85% of the total short interest.”

Speaking of shorted stocks, consumer discretionary, home to gaming equities, is the second-most shorted sector after real estate. No gaming stocks appear on Bank of America’s list of the 20 equities most underweight by hedge funds.

More Hedge Funds Could Embrace Caesars

Hedge fund ownership of Caesars, and other casino stocks for that matter, has room to increase because those market participants currently aren’t heavily exposed to cyclical stocks, which include consumer discretionary names.

Relative to long positioning in defensive sectors, hedge funds are currently underweight cyclical groups at nearly record levels. That’s while beta exposure “is well below average, and Value remains deeply underweight and historically cheap vs. Growth,” adds Bank of America. Additionally, casino equities have long-term reputations as being favored destinations for hedge funds.

Many hedge funds are opportunistic in their approaches to individual equities. Some overtly say they are looking to exploit “special situations” or that they are “activist investors.” Special situations include buying large amounts of shares of a company to push for a sale. Other hedge funds buy shares in a company with the aim of landing a board seat so they can drive change, including asset sales or major cost reductions.

For now, it appears hedge fund positioning in Caesars isn’t derived from either of the two factors mentioned above, as the Harrah’s operator isn’t for sale and it’s doing an admirable job of slashing debt without cajoling from the investment community.

Hedge Funds Could Benefit from Holding Caesars

Not all hedge funds are long-term investors, and some manage hundreds of equity positions, adding to and pruning those holdings every quarter.

If sell-side analysts are correct in their assumptions, there could be benefits for all long-only investors in holding Caesars. Of the 15 analysts covering the gaming name, 12 rate it “strong buy” or “buy,” and the average price target of $73.53 implies upside of 29.32% from current levels.

“While macro may cloud short-term stock moves on given market days, we believe it is time to revisit CZR as net leverage continues to rapidly decline,” wrote B. Riley analyst David Bain in a note out last week. “Less leverage, we struggle to find reasons why CZR should not trade at a premium valuation across its business segments.”