Mario Gabelli, frequent guest/commentator on CNBC and Barron's among others, is the founder, CEO and Chairman of Gabelli Asset Management Company Investors [GAMCO]. Gabelli was selected by The Institutional Investor as the 2010 Money Manager of the year. His individual net worth has been estimated by Forbes magazine at $1,000,000.00. As part of this year's Barron's Roundtable Gabelli recently divulged his ten favorite stocks for this year. We thought it would be a worthwhile exercise to discuss his ten selections and see if we are in agreement - here are Gabelli's final five picks: (See part 1 here)
Patterson Companies, Inc. (PDCO)
Patterson is a $3.72 billion market cap company that trades an average of 657,000 shares per day. Patterson distributes dental, veterinary and rehabilitation supplies. Gabelli is bullish on the dental business saying that as you age you spend more dollars per tooth. One positive is that Patterson only has three or four large competitors in the dental business. Gabelli sees earnings increasing from $2.30 this year to $3.00 in the next three years. Capital spending is a low $25 million per year so the company generates a lot of cash. Gabelli's thesis is that Patterson is a takeover or split-up candidate. We have always liked Patterson and we also rate the stock as a "buy".
Post Holdings, Inc. (POST)
Post is a $1.19 billion market cap company that trades an average of 201,000 shares per day. Post manufactures markets and distributes branded ready to eat cereal in North America. Post was spun off from Ralcorp last year. Gabelli likes both the business and the management. Gabelli is a fan of Bill Stiritz who runs Post. Stiritz, according to Gabelli, is a proven money maker and previously sold Ralston Purina to Nestle. Gabelli thinks that Post is an example of a cash generating company with pricing power. Our position is that Post is just a hold as we do not see much of a possibility for a takeover due to the highly concentrated cereal market. Additionally, we worry about its pricing power diminishing as consumer's trade down to house brands especially as corn, wheat and oat prices increase.
Viacom, Inc. (VIA)
Viacom is a $30.58 billion market cap company that trades 36,000 shares per day. Note that the company also has "B" shares that are listed and which trade for $2-$3 less per share but lack voting rights - the "B" shares trade over 4 million shares per day - Gabelli recommends the "A" shares. Viacom operates as an entertainment content company in the United States and internationally. Viacom was spun off from CBS in 2005 and Gabelli has been involved with this company for 25 years. Gabelli likes that Viacom has been buying back stock aggressively and shrinking the share count. Viacom had 755 million shares at the time of the split from CBS and are now down to about 507 million and Gabelli believes the share count will fall to about 355 million in the next three or four years. Gabelli sees earnings increasing from $4.36 in fiscal 2012 to $9.00 by 2016 as earnings grow slowly and share count shrinks. Gabelli has a target of $100.00 in three years. The wild card is 90 year-old founder and chairman, Sumner Redstone. We have long believed that content is key and think that Redstone could do a leveraged buyout once he is fully reconciled with his somewhat dysfunctional family. We rate the stock a strong buy
Weatherford International Ltd. (WFT)
Weatherford is a $9.48 billion market cap company that trades 10.6 million shares per day. Weatherford is an oilfield equipment and services company. Gabelli sees Weatherford as a turnaround story. Gabelli thinks earnings are capable of increasing from $0.60 per share to $2.40 in three or four years once they resolve some accounting, tax and management issues. Gabelli thinks Weatherford would make a good acquisition for a major capital equipment company. Weatherford fits our philosophy as we also see earnings increasing and think that a takeover is quite possible (perhaps General Electric?). We rate Weatherford as a "buy".
Xylem, Inc. (XYL)
Xylem is a $ 5.11 billion market cap company that trades 852,000 shares per day. Xylem engages in the design, manufacture and application technologies for the water industry. Xylem was spun out of IT&T in October 2011. Gabelli sees earnings going from $1.80 to $2.50 and thinks that the company could be bought at a 50% premium to the current stock price within the next two years. Our opinion is that with the global warming issue growing and droughts seemingly on the increase, that water is becoming strategic in nature. Water and water infrastructure companies are rather scarce. We would be a buyer of this stock.