Billionaire Mario Gabelli’s Top Stock Picks Include DirecTV

Billionaire Mario Gabelli’s asset manager GAMCO Investors has beaten the S&P 500 by a little over 2% per year since inception in 1986, and his small cap picks have done even better. No wonder the firm now invests over $30 billion. Gabelli, who was named Morningstar’s Fund Manager of the Year in 1997 and The Institutional Investor’s Money Manager of the Year in 2010, is one of a number of investors who have started with value investing founding fathers Graham and Dodd and added their own twist on that long-standing advice. In Gabelli’s case, it is the insight that an investor can approach a public company from the perspective of an acquirer; some businesses may be worth more in the private market than as publicly traded companies, and so a valuation that looks fair in the markets may be very attractive from a buyer’s perspective. This generally results in a focus on cash flow as opposed to earnings. In the 1980s- the height of the leveraged buyout craze- this was a particularly lucrative investment strategy, but as the recent awards demonstrate Gabelli and GAMCO have continued to be good investors.

The changing times- and, we’d imagine, GAMCO’s increasing size- have caused the firm to take an interest in other financial engineering techniques that can unlock shareholder value, including spinouts. A number of investors like to invest in spinouts because management of the independent companies can focus more on the core business; in addition, the market may place a high multiple on a new company that had formerly been an overlooked asset. Read more about spinouts. Other techniques might include taking note of movements by activist investors and attempting to determine if they will be able to drive management into increasing shareholder value. Here are our thoughts on Gabelli’s five largest holdings as of the end of September:

DIRECTV (NASDAQ:DTV). DirecTV was GAMCO’s top pick. It looks fine cash flow wise for a $45 billion enterprise value company- the EV/EBITDA multiple is 6.3x- and in terms of earnings it looks like a good value candidate as well with a trailing P/E of 12. Revenue and earnings were up moderately last quarter compared to the third quarter of 2011. Warren Buffett’s Berkshire Hathaway owned almost 30 million shares at the end of the quarter, making it one of the holding company’s top ten picks (find Buffett’s favorite stocks).

American Express Company (NYSE:AXP). Another Buffett favorite, American Express was one of the ten most popular financial stocks in our database of 13F filings (see the full top ten list). The credit and charge card issuer, which also acts as a travel management company, carries trailing and forward P/E multiples of 13 and 12 respectively. Its business was about flat in the company’s most recent quarter compared to the same period in the previous year.

National Fuel Gas Co. (NYSE:NFG). Gabelli and his team also liked the $5.7 billion enterprise value company, which is fully integrated from exploration and production through pipeline, storage, and utility operations. The enterprise value is nearly 8 times trailing EBITDA and our guess is that GAMCO expects some kind of breakup or spinout to take place here; it’s rare to see a company which produces energy and acts as a utility, and perhaps shareholders would benefit from more focused management and more independently analyzed stocks.

Ryman Hospitality Properties, Inc. (NYSE:RHP). Ryman is another combination of disparate businesses: it operates Gaylord branded hotels and a number of entertainment venues in the Nashville area. The EBITDA multiple is high and there is considerable short interest in the stock. Billionaire John Paulson nearly doubled his stake in the company last quarter to a total of 3.8 million shares (check out Paulson’s stock picks).

Viacom, Inc. (NASDAQ:VIAB). Viacom rounded out GAMCO’s top five picks. The trailing P/E multiple here is 14, and the EV/EBITDA multiple is 8; neither of those is necessarily attractive on its own, though Wall Street analysts expect considerable earnings growth in the next several years. This is yet another stock Berkshire has a large position in. Tiger Cub Andreas Halvorsen’s Viking Global initiated a position in Viacom last quarter (research more stocks Viking Global is buying).