Mario Gabelli reveals his market-beating secrets and offers some favorite stock picks

United States

One of the best things you can do as an investor is study established professionals who have amassed outstanding records. Value-stock investor Mario Gabelli fits the bill, with more than five decades of stock-market experience.

Gabelli’s GAMCO Investors oversees $ 32.4 billion in assets. It has 32 mutual funds, including two that recently caught my attention because of their substantial outperformance: Gabelli Small Cap Growth Fund GABSX and Gabelli Global Mini Mites Fund GAMNX.

Both have topped their benchmarks and fund categories by up to 6% on an annualized basis over the past three and five years, according to Morningstar Direct. That’s not easy to do. Gabelli manages the small-cap fund and co-manages Global Mini Mites. I thought it would be interesting to catch up with him to see what we can learn about investing, get his take on the economy and the stock market, and hear about some of his favorite picks these days. (This interview has been edited for length and clarity.)

MarketWatch: Let’s start with the big picture. What is your outlook for the U.S. economy?

Gabelli: It’s not what we do. But the consumer is in great shape, except there’s a portion of the consumer in the U.S. that’s being squeezed by food and fuel [prices].

Obviously, the big question is the geopolitical dynamic. You’d think that at some point, somebody’s going to have to deal with the puppeteer in the Middle East [Iran], and if they do, that can cause the price of oil to spike. I’ve gone through the 1973-74 through 1980-81 period when oil spiked substantially. That’s a wild card. 

So, the economy is OK. Cash flow at companies is quite good. Gross margins are better. You’ve got a geopolitical risk that can cause a fairly sharp decline. Other than that, OK. 

MarketWatch: This is probably not a good question for a value investor, but do you have a near-term outlook for the stock market?

Gabelli: We love volatility. Every time you have a company reporting results, the quants, the algos and the “momo” [momentum] investors pick it up and trade it. You’ve got a lot of short-term trading and that is continuing, so the volatility in the market is expected. I don’t have any strong feelings other than to point out that there’s no margin of safety because of the geopolitical risk. 

MarketWatch: Let’s talk about stock picking. What do you do that contributes to outperformance?

Gabelli: We’re a research boutique. We have conferences each year on the auto industry, health care, chemicals. So, we can see 200 or 300 companies over the course of the year just from our own conferences. The style is basically to learn about an industry. Learn about a company. Visit the management and visit the trade shows.

For example, because of my background in the auto parts industry, I looked at Strattec Security STRT, +0.66%. They make tailgates. You and I have a key or a FOB for our car. There are 285 million cars in the U.S. They have DNA in about 80% of those. That means that they can reproduce the keys if you lose them.

One of the things that could give this company a big multiple is if they can create a website that allows them to sell these online for recurring revenue. I think this company could earn $ 4 to $ 6 a share in their automobile business. I think they’re going to do okay over the next 12- to 18 months because I think car production is going to be all right even with higher-for-longer interest rates.

MarketWatch: What else about your approach to stocks can we learn from?

Gabelli: The idea of owning a good business with good management, buying it a reasonable price, and holding for the long-term. I’ll give you an example, GATX GATX, -2.80% out of Chicago. We’ve owned it now for 35 years. The stock has gone slowly up but it also pays a dividend. They lease rail cars. They know how to buy cars, and they know how to sell them. They know how to refurbish them. They know the pricing. We like that they buy back stock. We have a $ 28 cost in the small-cap fund. We bought some recently. 

In commercial aviation there’s a company called Textron TXT, -2.09%. It’s a decent business. Another good example is United Rentals URI, -6.27%, which is in equipment used in construction. I’ve been following United Rentals for 20 years. We are the largest shareholder Herc Holdings HRI, -6.41% in equipment rental.

Ryman Hospitality Properties RHP, -1.54% operates the Grand Ole Opry. Country [music] is becoming more popular because of Beyoncé and others. Ryman also has convention centers and they have done a very good job with those. 

In auto parts, AutoZone AZO, -1.41% and O’Reilly Automotive ORLY, -2.29% really know how to nurture the professional mechanic and individuals that come in and try to do it themselves. Another example is Deere DE, -2.38%.  So all of these are examples of good management, good businesses. 

We like to hold long term not only because we want to make money but we want our clients to keep it.

MarketWatch: You put a big emphasis on holding shares for the long term. Is that for the lower capital gains tax rate?

Gabelli: We’re in the marathon running business. We like to hold long term not only because we want to make money but we want our clients to keep it. I can’t do what the exchange traded funds do, and that is to wash out capital gains and not have the shareholders pay the government. So, we tend to buy and hold for an extended time. We try to be sensitive about taxes. I can take the savings for taxable accounts and compound that at an enormous rate. That’s what Warren Buffett does. That’s what we like to do: generate long term-capital gains and preserve wealth. 

MarketWatch: I’ve heard you say you like to own shares of ignored and unloved companies.

Gabelli: Analysts like me are a dying breed. Analysts that cover industries are disappearing. You want to find companies that are just not followed. If they’re not in index that makes them even more lovable. 

For example, I am looking at a company called National Presto Industries NPK, -0.04%. They make pots and pans. I started following it because years ago I would look at home appliances. They also have a munitions business, so this is not for everyone. But they have a good balance and smart management. Every year they make a big cash distribution. 

MarketWatch: What else do you look for in a business?

Gabelli: We look for catalysts. Is there an industry consolidation? Is there a change in the regulations that will cause an industry to come together? Is there something going on in another segment? Those would be examples of catalysts.

For instance, the United States has an election every four years, hopefully, for president and other politicians. Money is spent on television. Linear television still gets a substantial portion of that money. 

An example a company that will benefit is Tegna TGNA, -0.73%. Spending on television for presidential and political elections gives them a significant amount of cash flow and that cash flow will be used to buy back more stock.

They had a deal to be bought in a competitive bidding process for $ 24 a share and the Federal Communications Commission came up with the crazy idea of not allowing the deal to go through. They are for sale. They are well run. And we think you can make 50% on it in 12 months. 

We’re also large shareholders of the Atlanta Braves BATRA, -1.92%. Given everything we know about John Malone and Greg Maffei, we think they’re going to sell the company. Buy one share of the Atlanta Braves and we think you’ll get $ 55 12 to 18 months from now.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned BATRA, the Gabelli Equity Trust (GAB) and the Gabelli Healthcare & Wellness Trust (GRX). Brush has suggested AZO and BATRA in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks

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