Private-market value. It's a simple concept most investors overlook.
Yet it's an approach that has catapulted fund manager Mario Gabelli into the billionaires' club. He's made big profits at his firm, GAMCO Investors, which now manages more than $40 billion in client assets.
What is private-market value?
Private-market value, or PMV, is the estimation of what a company would be worth if it were private. Gabelli keeps a keen eye on the merger and acquisition (M&A) trends in many industries, keeping him updated on what any still-public company might receive in a buyout offer. He's not looking for these companies to be acquired, per se, but instead correctly notes that the market will eventually reward these temporarily underpriced stocks.
But how has Gabelli fared using the PMV approach?
GAMCO's investors have earned an average of 11.7% a year (after fees) over the past 25 years, beating the S&P 500's 9.7% annualized gain, according to GuruFocus.com. That may not seem like much at first blush, but thanks to the power of compounding, that adds up to a 50% gain on a cumulative basis compared with the benchmark.
With that in mind, it pays to look at what Gabelli and his team are buying. In the past few weeks, GAMCO has announced new or extended purchases of the following companies:
Marine Products (NYSE: MPX)
When the U.S. economy was free-falling in 2008, consumers stopped buying expensive toys. Sales of recreational vehicles (RVs) and boats plunged. As investors fled these stocks, Gabelli waded in, buying 963,000 shares of this boat builder. And he's been (mostly) buying ever since. With a fresh purchase of 123,000 shares in the first quarter of 2013, GAMCO now owns 1.4 million shares of Marine Products.
Gabelli's timing was a bit premature, as few consumers bought RVs and boats in the first few years after the recession. Yet this industry is finally springing to life. Marine Products recently posted a 17% gain in first-quarter sales -- and if history is any guide, it's on the cusp of a sustained upturn.
In 2004 through 2007, Marine Products always generated at least $244 million in revenue (and earnings per share (EPS) was typically above 50 cents). That sales figure slumped to $106 million in 2001, rebounded to $148 million in 2004 and could hit $175 million by next year, according to consensus forecasts. Gabelli is likely adding to this position now in anticipation of an eventual sales rebound north of $200 million within a few years.
Ferro Corp. (NYSE: FOE)
GAMCO made a bold move in the fourth quarter of 2008, buying 6.7 million shares of this specialty materials provider at an average price of $11. Shares eventually plunged below $5 as the global economic slowdown really took effect. Undeterred, GAMCO has been mostly deepening its hold on this stock, acquiring 1.4 million more shares in just the past quarter, bringing its total holding to 8.4 million shares.
Even as GAMCO has taken a passive interest in Ferro, activist investors have been pressuring the company to consider value-enhancing moves.
For example, they would like the company to meet with A. Schulman (Nasdaq: SHLM), which had offered $6.50 a share to buy the company and hints of a sweeter offer to come if Ferro engages in talks. GAMCO probably thinks a higher offer is warranted, considering its $8 a share average basis price in all its purchases, which is roughly 15% above the current share price.
Superior Industries International (NYSE: SUP)
GAMCO was also an early buyer of this beleaguered auto parts supplier in 2008, when its shares stumbled along with the entire sector. But this was no "bear-market special."
Shares have been on the upswing in recent quarters, and GAMCO is still buying. In fact, Gabelli has acquired 900,000 more shares during the past five quarters, doubling the size of his stake in this provider of lightweight aluminum wheels for cars and light trucks.
The rebound in the auto industry appears to have caught Superior off guard. The company's low-cost plants in Mexico are turning away business as they are already operating at capacity. As a result, management recently announced plans to expand those plants to handle higher production volumes and build a completely new plant in the Mexican state of Chihuahua, though such efforts will likely take several quarters to complete.
A key catalyst for this stock: Superior has almost $200 million in cash and no debt, and after the plant investments have been completed, management suggests that a share buyback program may be announced, augmenting the current dividend, which already yields 3.5%.
Risks to Consider: GAMCO appears to favor economically sensitive business models, which carry a higher degree of risk should the economy slump anew.
Action to Take --> These picks aren't especially sexy, but they reflect a sense that their bases of assets are being undervalued by the market. GAMCO has held some of these stocks for a number of years, which implies a farsighted view on portfolio gains. The fact that shares are still being bought, even after they have moved up from the original purchase price levels, tells you they still possess a PMV greater than their current market value.