We have been an investor in regional gaming operator and developer Penn National Gaming, Inc. (PENN) for more than four years. We have followed the company for a lot longer than that. Penn's share price fell 3.3% in the quarter. This is though Penn's business is growing nicely; it is quite profitable; and it holds very valuable real estate and licenses. Further, we think Peter Carlino, its entrepreneurial chief executive, who refers to himself as Penn's Shareholder in Chief, is one of the most straightforward, hardworking, honorable chief executives we know.We would have bought more Penn shares in the period were it not for two reasons. Our entire firm has been limited to ownership of 9.99% of Penn's outstanding shares by a state regulator or we would otherwise negatively impact Penn's ability to be licensed in that jurisdiction. Further, to manage risk, we have had an internal rule for many years restricting purchases in publicly owned businesses where we already own 9.99%. Last week Penn announced that it intends to separate its real estate and casino operating businesses into a gaming REIT and a casino operating company. Investors thought this was a great idea and bid up Penn's shares 28% in a single day! We think Penn remains undervalued, and when this restructuring is completed at the end of 2013, its share price could reach $60-70 per share. Of course, Penn's state licenses provide it with competitive advantage over others who might like to own and operate regional casinos.
From Baron Funds’ third quarter commentary.