Recommendations from Mario J. Gabelli's brokerage firm 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. Inc. has generated profits of 216% since its inception five years ago, compared with the 4.7% gain for the S&P 500. Last week, the company added
BlackRock Inc. Ticker:(BLK) and ITT Corp. Ticker:(ITT) to the “Focus Five,” joining Madison Square Garden Inc. Ticker:(MSG), National Fuel Gas Co. Ticker:(NFG) and NII Holdings Inc. Ticker:(NIHD).
Mr. Gabelli selects shares when they're discounted from their private-market value and he has reason to expect that 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, 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,” Mr. Kaufler said.
Mr. Gabelli, 69, made customers money as S&P 500 companies that analysts loved most rose 73% 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%, according to data compiled through Jan. 7 by Bloomberg. Downgraded stocks rose 0.6% and 1.9% more than the index in the next one and three months, respectively, according to a report released last week by Birinyi Associates Inc.
SMALLER COMPANIES
The Gabelli list of five stocks is picked from a universe of about 450 small and midsize companies covered by the company's 20 stock analysts. The group produced a gain of 18% for investors who bought an equal number of shares of each company Nov. 1, compared with an 8.7% advance by the S&P 500, the company said.
The performance of the list shows that investors can distinguish themselves by picking individual stocks even as returns 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% since 2008, compared with 33% going back to 1996, according to Maneesh Deshpande, an equity derivatives strategist at Barclays PLC.
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, Mr. 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. Ticker:(TTWO), gained 62% in the three-month period 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% from their June 2008 peak.
BlackRock, which has a market value of about $38.5 billion, and Walgreen Co. Ticker:(WAG), a drugstore operator with a market value of $39 billion, are the biggest companies ever named to the list, Mr. Miller said. BlackRock trades at about a 22% discount to its private-market value and is likely to be added to the S&P 500, according to Gabelli.
MSG rose 21% in the past three months, including a gain of 5.7% 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 firm said that at the current price, investors were assigning value only to its sports networks, not to its entertainment, real estate and development assets.
NATIONAL FUEL GAS
NFG, which gained 24% in the three-month period ended 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.
To be chosen for the list, a company must trade in the United States and have been the subject of a recent report by a Gabelli analyst, Mr. Miller said. A company can remain on the list for no more than two consecutive quarters.
Although there is no limit on size, the largest companies don't tend to qualify, Mr. Miller said.
Google Inc. Ticker:(GOOG), the owner of the world's most popular Internet search engine and the eighth-biggest U.S. company — with a market value of about $195.4 billion — “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,” Mr. Miller said.
