In this article we present the list of the top 10 small-cap stocks added to billionaire Mario Gabelli’s portfolio.
Sony Group Corporation (NYSE:SONY), American Express Company (NYSE:AXP), and The Walt Disney Company (NYSE:DIS) are among the most prominent large-cap stock picks of billionaire money manager Mario Gabelli.
Because of its large portfolio, Mario Gabelli’s GAMCO Investors is also a great fund to follow for its small-cap picks, which should be of interest to anyone looking for stocks with great growth potential. Gabelli founded the New York-based GAMCO Investors in 1977 and still serves as its chairman and CEO.
GAMCO Investors manages $32.6 billion in assets as of the end of 2020 and has returned 14.6% net of fees from its founding through the end of 2020, beating the S&P 500 by an average of 2.7 percentage points annually during that period.
The fund employs a wide range of investment strategies and manages several different funds, with one of its most prominent being its small-cap value composite, which GAMCO launched at the end of 1988 and which currently manages $3.4 billion in assets.
The fund’s value investment approach is to seek out mispriced businesses through fundamental, bottom-up research. Those businesses must also have existing catalysts that could drive value creation, which makes piggybacking GAMCO’s investment ideas a compelling proposition if those catalysts or expected share price gains have yet to materialize.
During the fourth quarter, GAMCO added 63 new positions to its 13F portfolio, several of which were small-cap stocks, while unloading 65 former holdings. The value of the firm’s 13F portfolio rose to $11.69 billion by the end of 2021, up from $11.31 billion a quarter earlier. GAMCO remained most heavily invested in the industrial sector, which has been its primary investment focus for over a decade.
Our Methodology
We took a look at GAMCO Investors’ latest 13F filing with the SEC to uncover any new small-cap (companies with a market cap of less than $5 billion as of March 29, 2022) positions added to the fund’s portfolio during Q4. Those new stakes have then been ranked in order of the value of GAMCO’s holding, from least valuable to most valuable.
We follow hedge funds like GAMCO Investors because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q4 2021 reporting period. In this article, we’ll take a look at the ten largest small-cap positions that GAMCO Investors added to its portfolio during Q4.
Top 10 Small-Cap Stocks Added to Billionaire Mario Gabelli’s Portfolio.
10. Bottomline Technologies, Inc. (NASDAQ:EPAY)
Value of GAMCO Investors’ 13F Position: $435,000
Number of Hedge Fund Shareholders: 31
GAMCO was far from the only hedge fund to take a keen interest in Bottomline Technologies, Inc. (NASDAQ:EPAY) during Q4, as hedge fund ownership of the company jumped by 41% during the quarter. Matthew Halbower’s Pentwater Capital built the largest new stake, valued at over $84.7 million, while Philip Hilal’s Clearfield Capital is by far the most bullish on EPAY in terms of portfolio allocation, as the fund has 27.83% of its 13F assets riding on the company.
The ownership jump isn’t surprising given that Bottomline Technologies, Inc. (NASDAQ:EPAY) is now set to be taken private in the second quarter of this year by private equity firm Thoma Bravo. The $2.6 billion all-cash deal will help further fuel the company’s growth, while also giving it access to Thoma Bravo’s own payments industry expertise.
While there may be few gains left to be had in the shares of Bottomline Technologies, Inc. (NASDAQ:EPAY) before they’re taken off the market, other GAMCO top stock picks like Sony Group Corporation (NYSE:SONY), American Express Company (NYSE:AXP), and The Walt Disney Company (NYSE:DIS) could be poised for big years in 2022.
9. Napco Security Technologies Inc (NASDAQ:NSSC)
Value of GAMCO Investors’ 13F Position: $505,000
Number of Hedge Fund Shareholders: 9
There was also an 80% jump in hedge fund ownership of Napco Security Technologies Inc (NASDAQ:NSSC) during Q4, as multiple quant funds found something intriguing about the security products company’s recent results.
Napco Security Technologies Inc (NASDAQ:NSSC) grew revenue by 23% year-over-year during its fiscal Q2 of 2022, growing equipment revenue by 18%, and more importantly, recurring service revenue by 35%. The company did miss EBITDA and EPS estimates for the quarter however, which took a hit from the company’s supply chain challenges.
Napco Security Technologies Inc (NASDAQ:NSSC)’s gross margins are being negatively impacted not only by the ongoing supply chain issues, but also the company’s lower-margin Starlink radios featuring more prominently in its product mix. On the other hand, those radios are a key driver of the company’s recurring revenue, and gross margins on that revenue did tick up to 87% from 85% during the company’s latest fiscal quarter.
8. Wendy’s Company (NASDAQ:WEN)
Value of GAMCO Investors’ 13F Position: $562,000
Number of Hedge Fund Shareholders: 27
Fast food chain Wendy’s Company (NASDAQ:WEN) is a fairly popular small-cap stock among hedge funds, though ownership of it did drop by 18% during Q4, despite GAMCO’s purchase of 23,550 shares. Nelson Peltz’s Trian Partners has held a large stake in Wendy’s, one of the 10 Best Fast Food Stocks to Buy Now, since 2011.
Wendy’s Company (NASDAQ:WEN) began to exhibit some renewed strength in 2021, achieving double digit same-store sales growth on both a 1-year and 2-year basis. 2021 also marked the company’s 11th-straight year of same-store sales growth. Overall sales grew by 12% year-over-year.
Wendy’s has been able to drive traffic thanks in part to its growing breakfast business, which accounted for 10% of the company’s sales by the end of last year. Wendy’s Company (NASDAQ:WEN) also continued to expand its global footprint last year, opening more than 200 stores, which contributed 2 percentage points to the company’s year-over-year sales growth.
7. Ironnet Inc. (NYSE:IRNT)
Value of GAMCO Investors’ 13F Position: $869,000
Number of Hedge Fund Shareholders: 10
GAMCO didn’t bite on cybersecurity firm Ironnet Inc (NYSE:IRNT)’s Q3 IPO, which followed the company merging with special purpose acquisition company LGL Systems Acquisition Corp. in late August. The fund did buy 206,827 IRNT shares during Q4 however, building the largest long position in the stock among the hedge funds that we track in the process.
Ironnet Inc (NYSE:IRNT) shares skyrocketed out of their IPO, briefly topping $47 at one point in mid-September. They now trade for just $4.19 apiece and even fell under $3 per share in late January. In a recent report, White Diamond Research predicted shares would fall to $0.50, stating that the company has a product that “nobody really wants.”
While Ironnet Inc (NYSE:IRNT) certainly has an impressive foundation, being helmed by retired four-star General and former NSA Director Keith Alexander, its financial results have left a lot to be desired. The company pulled in just $6.9 million in revenue in Q3 and lost a hefty $2.22 per share. The company was in the process of waiting on several multi-million dollar opportunities which it claims have been hampered by government funding delays.
6. Lee Enterprises, Incorporated (NYSE:LEE)
Value of GAMCO Investors’ 13F Position: $984,000
Number of Hedge Fund Shareholders: 7
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Closing out the first half of this list is Lee Enterprises, Incorporated (NYSE:LEE), which GAMCO bought 28,500 shares of during Q4. Hedge fund ownership of LEE has been volatile in recent quarters, rising as high as 15 and falling as low as 3 since the middle of 2020.
Lee Enterprises, Incorporated (NYSE:LEE) became the target of an unsolicited takeover event during the fourth quarter, which likely contributed to several funds buying into the stock. The newspaper chain and digital publisher, which hit 450,000 subscribers at the end of 2021, was given a $141 million buyout offer by Alden Global Capital in November. The company promptly rejected that offer and adopted a poison pill shareholder plan.
Another fund, Praetorian Capital, had this to say in its Q4 2021 investor letter about Lee Enterprises, Incorporated (NYSE:LEE) and the fund’s activism in regards to the buyout offer:
“During the fourth quarter, this fund engaged in shareholder activism. While I’d prefer to avoid the distractions of activism, I refuse to let us be a victim. The case in question involved our filing a 13D in relation to an unsolicited take-over proposal for Lee Enterprises (LEE – USA) at $24. I believed that the offer was woefully inadequate and made my point known to LEE’s Board of Directors. Fortunately, the Board proceeded to reject the offer the following day. In the five trading days after we filed our 13D, the shares appreciated as high as $41, showing that other market participants agreed with me that $24 was inadequate. Once again, I don’t intend for this fund to go looking for fights, but I don’t intend to get abused either. As the fund gets larger, we will inevitably give up some of our edge in terms of liquidity; hopefully we’ll more than offset that by our ability to have our voice heard when necessary.”
While big companies like Sony Group Corporation (NYSE:SONY), American Express Company (NYSE:AXP), and The Walt Disney Company (NYSE:DIS) rarely enjoy catalysts like prominent mergers, small-cap stocks like Lee Enterprises, Incorporated (NYSE:LEE) do, frequently resulting in big gains for shareholders. Shares of LEE have gained 44% since the buyout offer.
5. Veoneer, Inc. (NASDAQ:VNE)
Value of GAMCO Investors’ 13F Position: $1.03 million
Number of Hedge Fund Shareholders: 29
Veoneer, Inc. (NASDAQ:VNE) is another merger play that was added to the 13F portfolio of Mario Gabelli during Q4, as the company is set to be acquired by SSW Partners and QUALCOMM Incorporated (NASDAQ:QCOM) for $37 per share on April 1.
Upon the completion of the merger, Veoneer, Inc. (NASDAQ:VNE)’s current chairman, president, and CEO, Jan Carlson will be replaced by Jacob Svanberg, who currently serves as the company’s senior VP lidar product area and corporate development. Carlson will be appointed as an advisor to the board, and to the new CEO.
Veoneer, Inc. (NASDAQ:VNE) was originally set to be acquired by Canadian auto parts giant Magna International Inc. (NYSE:MGA) for $31.25 per share in a deal that had been approved by the shareholders of both companies. Qualcomm later swooped in with a higher bid, which Magna refused to match, collecting a $110 million merger termination fee from Veoneer instead.
4. KKR Real Estate Finance Trust Inc. (NYSE:KREF)
Value of GAMCO Investors’ 13F Position: $1.04 million
Number of Hedge Fund Shareholders: 8
The number of hedge fund shareholders of KKR Real Estate Finance Trust Inc. (NYSE:KREF) in our database doubled to eight during Q4, with GAMCO Investors being one of the funds to take a new stake in the real estate financing company.
KKR Real Estate Finance Trust Inc. (NYSE:KREF) originated 37 loans in 2021, more than half of which were from repeat borrowers. The total value of KKR’s originations topped $1 billion during each of the past two quarters, and the company expects that to be the norm going forward.
KKR Real Estate Finance Trust Inc. (NYSE:KREF) pulled in GAAP net income of $0.59 per share in Q4. However, distributable earnings came in at negative $0.05 per share owing to the company writing off $0.55 per share worth of loans as realized losses.
3. GARRETT MOTION Pref Shs (NASDAQ:GTXAP)
Value of GAMCO Investors’ 13F Position: $4.61 million
Number of Hedge Fund Shareholders: 28
Several prominent money managers took stakes in GARRETT MOTION Pref Shs (NASDAQ:GTXAP) during Q4, including Gabelli, Howard Marks, Seth Klarman, and Prem Watsa. GAMCO Investors bought 504,220 shares of GTXAP.
GARRETT MOTION Pref Shs (NASDAQ:GTXAP) achieved $3.6 billion in net sales in 2021, a 20% year-over-year increase on a GAAP basis. According to the company, its growth rate outpaced global auto production by 12.5 percentage points, being driven in large part by the company’s aftermarket and commercial vehicle businesses, which grew sales by 21% and 25% respectively last year.
While Garrett Motion has been facing the same supply chain challenges that have beset so many industries, hedge funds appear to be confident about the company’s transition to electric vehicle products and its growing ability to return cash to shareholders.
Here is what Alluvial Capital Management had to say about GARRETT MOTION Pref Shs (NASDAQ:GTXAP) in its Q4 2021 investor letter:
“Garrett Motion is also feeling the effects of the troubles with global supply chains. Difficulties in sourcing semiconductors have led many large automotive manufacturers to slow production, which in turn delays orders for Garrett Motion’s turbochargers. Still, the environment has not prevented Garrett Motion from making progress on improving its balance sheet and beginning to return capital. In November, the company announced a plan to repurchase $100 million in common and preferred stock. Then in December, Garrett Motion announced it would accelerate the planned redemption of its Series B preferred stock held by Honeywell. By this time next year, Garrett Motion will have meaningfully reduced its liabilities and bought in quite a bit of stock at a very attractive price. As supply chains normalize, the company’s earnings and cash flow will benefit, giving the company the ability to return more capital to shareholders and invest in the transition to products for electric vehicles.”
2. Kyndryl Holdings Inc. (NYSE:KD)
Value of GAMCO Investors’ 13F Position: $5.11 million
Number of Hedge Fund Shareholders: 27
27 hedge funds, including GAMCO Investors, were shareholders of Kyndryl Holdings Inc (NYSE:KD) following the company’s Q4 spinoff from International Business Machines Corporation (NYSE:IBM).
While that figure sounds moderately impressive on its own for a small-cap company, it’s less so when one considers that there were 46 IBM shareholders in our database, all of whom received Kyndryl Holdings Inc (NYSE:KD) shares upon the Q4 spinoff. Thus, nearly half of IBM’s own shareholders wanted nothing to do with its former managed infrastructure services business, which will remain a prominent IBM customer.
It’s not hard to see why, as Kyndryl Holdings Inc (NYSE:KD) was one of the slower-growing and lower-margin segments of IBM, which itself isn’t exactly growing like gangbusters or achieving fat margins. For that reason, KD shares have hit the ground staggering like a punch drunk boxer, losing over 67% of their value since being forced to stand on their own two feet back in November.
1. SPX FLOW, Inc. (NASDAQ:FLOW)
Value of GAMCO Investors’ 13F Position: $5.40 million
Number of Hedge Fund Shareholders: 31
Topping the list is SPX FLOW, Inc. (NASDAQ:FLOW), which not only got the largest investment from Mario Gabelli among his new small-cap stock picks, but which also has more hedge fund shareholders in our database than any of the other stocks on this list (tied with Bottomline). The hedge funds tracked by Insider Monkey owned over 12% of FLOW’s shares on December 31.
The possibility of a takeover also played a role in SPX FLOW, Inc. (NASDAQ:FLOW)’s recent performance, with shares jumping by 39% since an unsolicited takeover attempt by Ingersoll Rand Inc. (NYSE:IR) last year for $85 per share. While that deal was rejected, the maker of precise measurement tools ended up accepting an only marginally better $86.50 per share offer from Lone Star Funds in December, owing in part to shareholder pressure to consummate a deal.
Here is what Diamond Hill Small Cap Fund had to say about SPX FLOW, Inc. (NASDAQ:FLOW) and the potential sale of the company in its Q3 2021 investor letter:
“On an individual holdings’ basis, top contributors to return included SPX Flow. SPX Flow, a manufacturer of industrial flow control systems such as pumps, valves and mixers, benefited from news it had been approached by Ingersoll Rand about a possible acquisition. SPX rejected the proposal but is reviewing its strategic options, including interest from two other potential buyers. To us, this is a sign the market still undervalues this quality business but other strategic buyers see the value we do. We are confident management will either hold out for a price reflective of long-term intrinsic value or continue to execute as a standalone company, growing intrinsic value at an attractive rate for years to come.”
For more on the latest trades made by some of the biggest hedge fund managers in the world, check out 10 Oil & Gas Stocks to Buy Today According To Rajiv Jain’s GQG Partners and 10 Stocks to Buy According to Canyon Capital Advisors.
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Disclosure: None. Top 10 Small-Cap Stocks Added to Billionaire Mario Gabelli’s Portfolio is originally published at Insider Monkey.
