The Bronx-born mutual fund maven illustrates the value of education and hard work, and offers a trove of his best ideas for the current market.
The old cynical adage that holds that the best way to end up with a small fortune in the stock market is to start out with a large fortune does not apply to Mario J. Gabelli, who came from modest means but after more than 55 years as a professional investor has a net worth of $1.7 billion. Born in the Bronx to an Italian immigrant family who lived in an apartment above a delicatessen, Gabelli, 80, learned the value of hard work and education from his parents, neither of whom had gone to school beyond sixth grade. Gabelli’s enterprising spirit was evident from a young age, and so was his propensity to excel in Catholic private schools. As a boy, he traveled with his shoeshine box all over the Bronx and Manhattan, and from the age of 12 he began hitch-hiking and taking long bus rides to caddy for golfers at prestigious country clubs in New York’s suburban Westchester County: the renowned Winged Foot in Mamaroneck and Sunningdale in Scarsdale.
Many club members worked on Wall Street as specialists on the floor of the New York Stock Exchange, and their discussions during rounds on the course and afterward at the 19th hole inevitably gravitated toward stocks. The teenage caddie from the Bronx learned a lot from what he overheard and was bitten by the investing bug. Before he started high school at Fordham Prep, Gabelli bought his first stocks: Beech Aircraft, Philadelphia & Reading, IT&T and Pepsi-Cola.
Gabelli’s academic prowess allowed him to earn scholarships to attend nearby Fordham University, picking up an undergraduate degree in accounting in 1965. Immediately after graduation, he earned another scholarship and went to Columbia University’s Graduate School of Business, the virtual Valhalla of value investing where Warren Buffett studied under Benjamin Graham, who developed the concepts of security analysis and value investing three decades earlier with David Dodd.
At Columbia, Gabelli studied under economist Roger Murray while carpooling to campus and racing to the phone booth to buy stocks with classmate and fellow billionaire investor Leon “Lee” Cooperman. “There was only one pay phone in the school,” says Gabelli. “We’d rush out and Lee would always get there first, but we decided that we would share brokers,” recalls Gabelli.
After graduating from Columbia in 1967, Gabelli worked on Wall Street as a brokerage analyst covering autos, farm equipment and conglomerates, eventually starting his own research firm in 1977. He started managing institutional money and a suite of mutual funds shortly thereafter. His research driven investment company Gabelli Asset Management Company (GAMCO) has about $30 billion under management in dozens of mutual funds, closed-end funds and ETFs ranging from his flagship,Gabelli Asset Fund to his micro-cap focused Gabelli Global Mini Mites Fund and a relatively new ETF dubbed Gabelli Love Our Planet and People ETF. His longest running strategy, Gabelli Asset ManagementValue, has returned 14.1% annually since inception in 1977, versus about 11.5% for the S&P 500. The billionaire and his wife, both signers of Warren Buffett and Bill Gates’ Giving Pledge, have donated generously to institutions of higher education, including Fordham, Boston College, Columbia Business School and Iona University.
Gabelli’s investing framework is focused on determining the value that a publicly traded company would fetch if it were to be acquired, which is some multiple of market capitalization plus net debt (enterprise value). The key calculus value investors use in discerning the “intrinsic value” of a company is typically based on the discounted present value of the future earnings or cash flow, as well as the net assets on its books. Gabelli, like other value investors, seeks companies whose prices trade below their intrinsic or acquisition value.
Some of his current favorites are in auto parts, gaming and entertainment. Gabelli finds it hard to ignore the hyperbolic growth of sports team valuations, witnessed last month with billionaire investor Marc Lasry’s sale of his interest in the Milwaukee Bucks at a $3.5 billion franchise valuation, 52% higher than the NBA team’s $2.3 billion valuation Forbes figured last November. Accordingly, Gabelli has money in the game with Madison Square Garden Sports (MSGS), which owns the NBA’s New York Knicks and NHL’s New York Rangers. Down south, Gabelli owns shares of Atlanta Braves owner, Liberty Braves Group (BATRA).
Gaming and aerospace are two more sectors where Gabelli finds good value. He’s been a big buyer of casino and resort owners Caesars Entertainment (CZR) and Wynn Resorts (WYNN). He’s also invested in defense contractors Crane (CR) and Textron (TXT). What follows is the transcript of a recent zoom call with the legendary investor, where we discuss his approach to finding winning stocks, plus a few additional small-caps his funds are invested in.
MARIO GABELLI’S BRONX TALE
The 80-year old billionaire reflects on his journey from carrying golf bags for some of the richest guys on Wall Street to how he became wealthier than all of them.
FORBES: How would you describe your investing style?
GABELLI: I think it is simple. When I was at Fordham, I was an accounting major; finance and global taxes at Columbia graduate school. You basically take an annual report and you drill into it. So you look at that. But more importantly, because you follow an industry, you go in and read all the trade magazines, you go to all the conferences, you go see five, six companies. So if I’m visiting company X that’s making brake pads and I can ask them what’s going on in the industry. But then I go to the second company and ask them what’s going on about company X. And so you get a feedback mechanism.
For example, one time there was a company, Snap-on Tools, they then created Safety Clean. So I’m saying to myself, listen, I go to a local gas station guy and I say, what are you buying? I convinced the company to allow me to ride on the truck and watched how the guy actually functioned and how he made money. So we would go bottoms up in an industry in which we cover a lot. If you’re what they call a special situations analyst or a generalist, you don’t have as much time to focus. So the notion of intense focus on selected industries.
In the area of automotive–we still have our 46th annual auto parts conference coming up–you have everyone showing up from Intel (INTC), to those that sell used cars to those that sell batteries to sell to electric vehicles (EVs). And so you transition that over an extended period.
But the bigger change for me [as an analyst] was when the Berlin Wall fell. I was president of the Auto Analysts of New York. We used to go to China and Japan in the early ‘80s, I was actually in Japan a little earlier. But not to invest, just to understand what’s going on. When the Berlin Wall came down in November 1989 and Tiananmen Square, we said we’ve got to go global. So that’s the other part of the dynamics that have unfolded. And that’s it. Our analysts do look at industries in which we have significant, accumulated and compounded knowledge, and we still make mistakes.
But it’s like baseball. As long as you make fewer mistakes than you do great plays, you’re going to do fine.
Well, it’s like Ted Williams, who batted .400, but it means you made out three out of five times.
Looking back on your investing career, going back to the 1960s, 1970s, is there a single big triumph that you like to think about, and say, wow, that was really a great one?
Well, I was very fortunate to cover the broadcasting industry. And because I did broadcasting, I really was able to understand the impact of inflation on revenues, gross margin and cash flow. Secondly, I was very fortunate to have Tom Murphy and Dan Burke in Midtown Manhattan running a company called Capital Cities. I watched what they did in terms of use of cash flow. Going into, and then buying ABC, and then merging that into Disney (DIS). So you look at Tom, who just passed on within the last year or so. And following an individual like that with regards to understanding where they derived the demand, understanding all the rules and regulations, understanding how they did tax structuring and deal structuring, was extraordinarily helpful. But the other part that you should be aware of is that I followed business services. In Manhattan was a company called Pinkerton’s (which we owned). In Briarcliff, there was a company called Burns Detective Agency. In Florida, which is why I’d go to Miami, was Wackenhut. And when I went to see Wackenhut, I’d have to go see Wometco. But staying with that, a big investor in Pinkerton’s, which was down in the Wall Street area, was Warren Buffett. So I started reading about what is Warren doing? How he did work, how he was at Columbia with Graham and Dodd, and had Graham as a professor. Benjamin Graham was a partner of Jerry Newman, who ran Philadelphia and Reading (a railroad), which was one of my early stocks so I kept following that. So that’s how I got to really focus on Buffett. We knew about him, but you never watched the mechanics of it. So when I started one of my funds, I immediately bought Berkshire Hathaway (BRK.A), that was at $3,000 a share.
Well, I think it’s gone up a little since then. That’s a homerun. Did you ever get burned early in your career or later in your career?
What happened was the following, I go to Los Angeles and visit with Earl Scheib.
The company where you would get your car painted?
Any car, any color, for $19.95. I did have an old car that I did bring, and they did the windshields, and they painted too much of the car. So I would go out there. But he’d say, “Mario, of course I’ll see you. However, you have to be here at 7:30.” And I said, “Fine, because I’m up at 4:30; I’m at work already in New York. But then, I finally asked him why. He says, “Well, because I have horses running at Santa Anita and I want to get to the racetrack.” But bottom line, they had a great business. But they refused to do a few things like morph into repair and maintenance. And I held the stock for probably 30 years. So it’s the loss of return on capital.
Then we had other companies that have gone bust over the years where you enter into its cycle and that taught a lesson about not buying certain companies that were highly leveraged going into the cycle. That went into la-la land and had negative cash flow, and balance sheets that were highly levered. And when the interest rates started going up, those are the ones that have had some challenges, like Carvana (CVNA).
What are some of the stocks that you’re really going for now, one characteristic would be low debt levels?
There’s two types. Right now in an ideal world, you would have a good business with good management at a low value. Yesterday we were looking at one with a good business, great management, but a high valuation. The guy has done a great job running but it’s now 25x earnings. There are times in a cycle–I’m not saying we’re there yet–but where you buy back an okay business with uninspiring management, but you’re buying at a distressed price. Because what’s going to happen to that company is somebody’s either–even if they have no debt–going to buy it to consolidate a sector and they’re going to basically increase Ebitda or operating profits at a substantial rate with very little limited incremental effort.
I’m not saying we are there yet, but recently we were, because of our work with Herc Rentals (HRI), our work with Terex (TEX) and somebody reminded me yesterday that I had written a report on this company called Manitowoc (MTW). It was “cranes, cubes, because they had ice cream machines and cash.” So we started buying the stock at $8. All of a sudden because of the Inflation Reduction Act and the IIJA, they’re going to get a lot of money in infrastructure improvement. The stock has gone to $18 from $8–an uninspiring company.
One that is going to report shortly that is equally uninspiring is a company called Hyster-Yale Material Handling (HY), located in the Cleveland area, which makes forklifts. They have 16 million shares and the stock is $30, so a $480 million market cap. There is some debt obviously, but they sell equipment in China. So if I am trying to automate a warehouse and you have re-shoring in the United States, you’re going to buy their equipment. They needed to get into more electrics faster
There’s another company, but that’s privately owned in that area, that’s doing a great job. I talk to the CEO every so often because he’s involved in some organization I’m involved in. But they also have been cash burned developing hydrogen. Earnings will be kind of lackluster in the quarter, but can I make a triple or quadruple in the next three or four years? Yeah.
I’ve got a company in Milwaukee, Strattec Security (STRT), four million shares, stocks at $20, decent balance sheet, no debt, no pension. It has operations in China, Europe and Mexico. And what they do is make the tailgate on the Ford Lightning, so they’re on the EVs. But they also do something else. For example, if you have a car, I’m looking for my key for my car, anybody, you have a fob.
Yeah, sure.
They have the “DNA” on about 80% of the 290 million cars in the United States, and they are involved with a German company that can help you around the world. So what you need is the cycle’s going to improve. They’re going to earn, let’s say $6 to $8 in this cycle. Then how do you get a multiple? You get a multiple because they can take that fob DNA and they can offer it to you and me at $2 a month. If you ever lose [your car key], the next day we’ll get it sent to you. If you go try to get it now, you’ve got to schlep down to the dealer, and you’ve got to pay $300 or $400. So they have that capability but they’re not listening [to me]. So the management is okay; they were spun off from Briggs & Stratton. So those are the kinds of things we look at.
Now, why do we even look at this is because we look at OEM companies. So when you go to Milwaukee, you see Badger Meter (BMI), you see Briggs & Stratton, you see this company, you see Rockwell (ROK). So we go in and we see four or five companies. So if you fly to Milwaukee, you don’t see one company and come back. My most recent trip, we went up to Racine, Wisconsin, drove up to that part of the world and saw about six companies in a day. We drive fast. The two companies in Racine that we own now are Modine Manufacturing (MOD), and we own another one called Twin Disc (TWIN). Modine has a new management and the stock’s gone from $10 to $25. He has an interesting opportunity in data centers, because the company is providing infrastructure support for data centers and that’s doing well. Secondly, they’re managing the cost structure better, so there’s a lot of improvements.
There are a lot of good companies. There are a lot of good managements. So we started with a hall of fame. Every year we induct three to four individuals from companies we follow in which the values have surfaced. For example, this year we’ve taken a guy from Swedish Match (SWMAY), long story, and he’s coming into it because Philip Morris (PM) bought them and clients owned a ton of it. We got a guy out of Nashville by the name of Colin Reed who runs the Ryman Hospitality Properties (RHP).
That is a real estate investment trust, correct?
Yeah, that’s the REIT. They own the Ryman and they own the Gaylord, and they got one in Denver that opened within the year. They got one in Washington, D.C., which is doing okay, but not great. They got one in Texas, which is booming and so on. That’s part of the business, they converted that to a REIT format.
And then the other businesses, they’re in the entertainment business. Somehow, they realized that the late Loretta Lynn started off in Nashville and is Country and Western, and they’ve got a whole bunch of infrastructure support for that. And you got, you’re talking about 60 million shares of a $90 stock, $5.4 billion market cap. A little more debt than I like, but the cash flow is fine.
Is there anything that you think is very important for investors to know in the current economic climate?
Basically for a new investor, if you’re 20 years old and you grew up on Fortnite, you like to have short-term gains, think about the long term. That is the notion of compounding of value over an extended period of time. I have a grid that I use when I give college talks about how to become a billionaire. And that is to have one less [coffee], and I’m not knocking Starbucks, I just use it as an example, and take that money for that and invest it. So one less per day, and you’re putting $35 in a week, and you grow it at 4, 6, 8, 10% over the next 40 years, where are you going to be? And if you really want to help yourself, one less beer, truly, one less White Claw.
And if you are lucky enough to have a grandparent or parent that can start a 529, the government is going to allow you to take a portion of that and put it into a Roth IRA.
I appreciate you taking the time to share some of this wisdom. One less beer. One less coffee. Thanks Mario.
Excerpted from the March 2023 issue of Forbes Billionaire Investor
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Source: https://www.forbes.com/sites/johndobosz/2023/03/11/17-stock-ideas-and-life-lessons-from-billionaire-value-investor-mario-gabelli/