Gabelli's picks up 216% in five years — so what's he touting now?

Recommendations from Mario J. Gabelli's brokerage are trouncing returns in the U.S. stock market as analysts at the biggest securities firms struggle to prove their worth. The quarterly list from Gabelli & Co. generated profits of 216 percent since inception five years ago, compared with the 4.7 percent gain from the Standard & Poor's 500 Index. Yesterday, the Rye, New York-based company added BlackRock Inc. and ITT Corp. to the “Focus Five,” joining National Fuel Gas Co., Madison Square Garden Inc. and NII Holdings Inc. Gabelli identifies shares at a discount to the private-market value of their assets, and reason to expect the gap will narrow. “Any bottom-up, fundamental investor is oriented toward this train of thought,” said Matthew Kaufler, a stock fund manager at Federated Clover Investment Advisors in Rochester, New York, which manages $3 billion. “The stock price is not fully reflective of the value of the real asset it represents, and he believes the two ultimately will converge. It's effectively a form of arbitrage.” Gabelli, 69, made customers money as S&P 500 companies that analysts loved most rose 73 percent on average since the benchmark for U.S. equity started to recover in March 2009, lagging behind those with the fewest “buy” ratings, which gained 165 percent, according to data compiled through Jan. 7 by Bloomberg. Downgraded stocks rose 0.6 percent and 1.9 percent more than the index in the next one and three months, Birinyi Associates Inc. said in a report yesterday. Smaller Companies The Gabelli list of five stocks is picked from a universe of about 450 small and medium-sized companies covered by the company's 20 stock analysts in Rye, New York. The group produced a gain of 18 percent for investors who bought an equal number of shares of each company on Nov. 1, compared with an 8.7 percent advance by the S&P 500, the company said. The performance of the list shows investors can distinguish themselves by picking individual stocks even as returns from shares have become more tightly clustered, said Daniel Miller, the 30-year-old head of institutional equities at Gabelli. The average correlation among the 50 biggest companies in the S&P 500 has been 47 percent since 2008, compared with 33 percent going back to 1996, according to Maneesh Deshpande, equity derivatives strategist at Barclays Plc in New York. Takeover Potential The universe from which the five stocks are drawn has a median market value of $4.2 billion, compared with $11.6 billion for the S&P 500, Miller said. It favors smaller companies because they are more likely to be purchased -- one of the main ways that discounts to private market value can shrink, he said. The best-performing stock in the history of the Focus Five list, Take-Two Interactive Software Inc., gained 62 percent in the three months ended April 30, 2008, after Electronic Arts Inc. offered to buy the video-game publisher. Take-Two rejected the offer, and its shares are down more than 50 percent from their June 2008 peak. BlackRock, with a market value of $38.5 billion yesterday, and Walgreen Co., the drugstore operator with a market value of $39 billion, are the biggest companies ever named to the list, Miller said. BlackRock trades at about a 22 percent discount to its private-market value, and is likely to be added to the S&P 500, according to Gabelli. National Fuel Gas Co., which gained 24 percent in the three months through Jan. 31, got a boost from Chevron Corp.'s purchase of Atlas Energy Inc on Nov. 9 to gain control of its Marcellus Shale natural-gas assets in Pennsylvania. Madison Square Madison Square Garden Inc. rose 21 percent during the most recent three-month period, including a gain of 5.7 percent on Nov. 5 after third-quarter sales and profit topped analyst estimates. When Gabelli added the company to the Focus Five list four days earlier, the brokerage said at the current price investors were assigning value only to its sports networks, not to its entertainment, real estate and development assets. To be chosen for the list, a company must trade in the U.S. and have been the subject of a recent report by a Gabelli analyst, Miller said. A company can remain on the list for no more than two consecutive quarters. While there is no limit on size, the largest companies don't tend to qualify, Miller said. Google Inc., the owner of the world's most popular Internet search engine and the eighth-biggest U.S. company with a market value of $195.4 billion yesterday, “doesn't trade based on its potential for being acquired, whereas Madison Square Garden should trade based on its private market value, because in theory it shouldn't be a public company,” Miller said.