Billionaire Mario Gabelli’s asset manager GAMCO Investors has beaten the S&P 500 by a little over 2% per year since inception in 1986, and his small cap picks have done even better. No wonder the firm now invests over $30 billion. Gabelli, who was named Morningstar’s Fund Manager of the Year in 1997 and The Institutional Investor’s Money Manager of the Year in 2010, is one of a number of investors who have started with value investing founding fathers Graham and Dodd and added their own twist on that long-standing advice. In Gabelli’s case, it is the insight that an investor can approach a public company from the perspective of an acquirer; some businesses may be worth more in the private market than as publicly traded companies, and so a valuation that looks fair in the markets may be very attractive from a buyer’s perspective. This generally results in a focus on cash flow as opposed to earnings. In the 1980s- the height of the leveraged buyout craze- this was a particularly lucrative investment strategy, but as the recent awards demonstrate Gabelli and GAMCO have continued to be good investors.
The changing times- and, we’d imagine, GAMCO’s increasing size- have caused the firm to take an interest in other financial engineering techniques that can unlock shareholder value, including spinouts. A number of investors like to invest in spinouts because management of the independent companies can focus more on the core business; in addition, the market may place a high multiple on a new company that had formerly been an overlooked asset. Read more about spinouts. Other techniques might include taking note of movements by activist investors and attempting to determine if they will be able to drive management into increasing shareholder value. Here are our thoughts on Gabelli’s five largest holdings as of the end of September:
DIRECTV (NASDAQ:DTV). DirecTV was GAMCO’s top pick. It looks fine cash flow wise for a $45 billion enterprise value company- the EV/EBITDA multiple is 6.3x- and in terms of earnings it looks like a good value candidate as well with a trailing P/E of 12. Revenue and earnings were up moderately last quarter compared to the third quarter of 2011. Warren Buffett’s Berkshire Hathaway owned almost 30 million shares at the end of the quarter, making it one of the holding company’s top ten picks (find Buffett’s favorite stocks).