The stock that’s surged 150 percent this year – and could rise even higher

One might say that Scientific Games shareholders have hit the jackpot.

Out of all the stocks in the broad S&P 1500 index with more than $2 billion in market capitalization, the best performer this year is Scientific Games.

A provider of technologies and services for casinos, lotteries and digital games, the company has seen its shares skyrocket 150 percent this year, and nearly 300 percent over the past 12 months.

Good news for the company has come in the form of an uptick in earnings, as well as an improving debt situation. Still, the company is clearly not for everyone.

Scientific Games' ratio of net debt to earnings before interest, taxes, depreciation and amortization is above 7, according to a FactSet analysis of its most recent earnings report. And according to the ratings agencies, its debt remains well below investment grade.

Meanwhile, the stock's rally appears to have taken analysts by surprise. The median price target is $35, a full $4 below where the shares closed on Tuesday. And the most common rating is hold, according to data compiled by FactSet.

Not everyone casts such an evil eye on the stock. Union Gaming analyst John DeCree raised his target to $41 from $31 on Tuesday morning, explaining that he is encouraged by the company's ability to reduce its interest rate on more than $3 billion worth of loans in a refinancing.

"We're continuing to see a levered equity that's being looked at as down and out over the past 12 or 18 months, and it's been doing quite well," DeCree said Tuesday on CNBC's "Trading Nation." "They've finally been able to get some traction on deleveraging. … We think there's more room to go."

"There's a little bit more on the cost improvement side that they can do," DeCree added. "The topline trends are just starting to pick up — we see good gaming revenue in the regional U.S. and international as well, so we think Scientific Games product is positioned well."

"We see some more meat on the bone, and we're still bullish here."

Still, the analyst acknowledges that the stock's recent run may not have been driven entirely by fundamentals. The stock has been a popular target of bears, with short interest rising as high as 37.5 percent in early 2016, before sliding to a three-year low of 15.5 percent more recently, according to FactSet data.

Faced with a stock that's doubly volatile thanks to a high degree of leverage and intense interest among shorts (not to mention its natural exposure to economic vacillations given its highly discretionary line of business) other analysts have simply thrown up their hands.

"We continue to have a difficult time formulating an actionable investment thesis on SGMS shares at current levels," Stifel analyst Steven Wieczynski wrote in a recent research note. "On the one hand, the steady improvement in core business fundamentals, and the improved balance sheet flexibility for which it has allowed, has created a more approachable story, while on the other, the rapid ascent in the share price feels a little premature."

Wieczynski maintains a hold rating on the stock, explaining that "we remain on the sidelines until a better entry point presents itself."

Still, it is not difficult to see the bulls' case on this volatile name.

"As long as the economy keeps trucking along and credit markets stay open, I think we'll see another round or two of deleveraging over the next eight to 16 months for these guys, and as they chip away at that balance sheet and reduce debt, they'll see some really strong equity value created," DeCree said.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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