Billionaire Mario Gabelli’s Favorite Small-Caps Stocks for Q3

New York-based GAMCO Investors, led by value investing maverick Mario Gabelli, recently disclosed its U.S. equity portfolio via a 13F filing submitted with the SEC. As is the norm with value investors, the fund made very few changes to its $15.11 billion portfolio during the second quarter. According to the filing, GAMCO Investors’ equity portfolio had a quarterly turnover of only 12% during the period. The filing also revealed that going into the third quarter, the fund’s sector exposure was highest to the consumer discretionary and industrials sectors, with stocks from each amassing 25% of the value of GAMCO Investors’ equity portfolio.

Since GAMCO runs a fairly diversified portfolio with positions in hundreds of stocks and its top-ten holdings accounted for only 13% of the value of its portfolio, it’s not possible to reveal and discuss all of the stocks that the fund was bullish on going into the third quarter. Thus, in this article we’ll focus solely on the top-five small-cap holdings of the fund and try to determine why GAMCO is betting heavily on those names.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5. Edgewell Personal Care Co (NYSE:EPC)

– Shares Owned by GAMCO Investors (as of June 30): 1.9 Million

– Value of Holding (as of June  30): $160.25 Million

Let’s start with Edgewell Personal Care Co (NYSE:EPC), in which GAMCO Investors increased its stake by 14% during the second quarter. Shares of the Missouri-based personal care company have mostly been range-bound since it spun off its lighting and battery business into Energizer Holdings Inc (NYSE:ENR) last year. However, the stock suffered a minor beating recently after Edgewell Personal Care Co (NYSE:EPC) reported its third quarter of fiscal year 2016 results and is currently trading up by 2% for 2016. While analysts had expected the company to report EPS of $0.78 on revenue of $647.55 million for its fiscal third quarter, Edgewell declared EPS of $0.66 on revenue of $645.10 million for the period. Following the earnings release, analysts at Citigroup reiterated their ‘Buy’ rating on the stock on August 3, but lowered their price target on it to $94 from $97, which still represents potential upside of 16.6%. Phil Gross and Robert Atchinson’s Adage Capital Management increased its stake in Edgewell Personal Care by 300% to 399,051 shares during the second quarter.

#4. Crane Co. (NYSE:CR)

– Shares Owned by GAMCO Investors (as of June 30): 2.83 Million

– Value of Holding (as of June  30): $160.48 Million

GAMCO Investors has been gradually reducing its stake in Crane Co. (NYSE:CR) over the past few quarters. During the second quarter, the fund lowered the size of its holding in the engineered industrial products company marginally, by 1%. After losing a chunk of its value last year, Crane Co. (NYSE:CR)’s stock has been on fire this year, appreciating by over 35%. On July 26, the company reported its second quarter financial figures, declaring EPS of $1.21 on revenue of $712.20 million, which topped analysts’ expectations of EPS of $1.02 on revenue of $697.13 million. The company currently pays a quarterly dividend of $0.33 per share, which translates into a respectable annual dividend yield of over 2%. Thomas Bailard‘s Bailard Inc increased its stake in Crane Co. marginally during the second quarter, by 1% to 43,177 shares.

We’ll check out GAMCO’s three favorite small-cap stocks on the next page.

#3. Madison Square Garden Co (NYSE:MSG)

– Shares Owned by GAMCO Investors (as of June 30): 930,735

– Value of The Holding (as of June  30): $160.56 Million

Moving on, GAMCO Investors inched up its stake in Madison Square Garden Co (NYSE:MSG) by 1% during the second quarter. Madison Square Garden came into existence last October after it was spun off from MSG Networks Inc. (NYSE:MSGN). Though shares of the sporting company declined heavily over the next few months, they have performed well this year, rising by 15.02% year-to-date. Last month, Barron’s published an article on the company in which it argued that its stock was undervalued by as much as 35%. Madison Square Garden Co (NYSE:MSG) is expected to report its fourth quarter of fiscal year 2016 results next week and the current consensus estimate of analysts is for it to report a loss of $0.91 per share for the period. On August 9, analysts at Loop Capital reiterated their ‘Hold’ rating on the stock. D E Shaw, founded by billionaire David E. Shaw, lowered its MSG holding by 63% to 143,440 shares during the second quarter.

#2. National Fuel Gas Co. (NYSE:NFG)

– Shares Owned by GAMCO Investors (as of June 30): 3.25 Million

– Value of The Holding (as of June  30): $184.66 Million

Despite GAMCO Investors reducing its stake in National Fuel Gas Co. (NYSE:NFG) by 3% during the second quarter, the company jumped three spots in the fund’s portfolio to become its sixth-most valuable equity holding at the end of June. Owing largely to a bounce back in natural gas prices this year, National Fuel Gas Co. (NYSE:NFG)’s stock has performed well during the last few months and is currently trading up by 33.7% year-to-date. The company recently hiked its quarterly dividend payment by 2.5% to $0.41 per share, which translates into an annual dividend yield of 2.87%. On August 5, National Fuel Gas reported EPS of $0.68 on revenue of $335.60 million for its third quarter of fiscal 2016, showing solid bottom-line growth compared to the EPS of $0.55 on revenue of $339.80 million that it delivered for the same quarter of its previous fiscal year. Earlier this week, analysts at Barclays boosted their price target on the stock to $61 from $47 while keeping their rating on it unchanged at ‘Equal Weight’. Billionaire Cliff Asness‘ AQR Capital Management, which held 45,689 shares of National Fuel Gas Co. at the end of 2015, sold its entire stake  in the company during the first quarter.

#1. Ryman Hospitality Properties Inc. (REIT) (NYSE:RHP)

– Shares Owned by GAMCO Investors (as of June 30): 4.47 Million

– Value of The Holding (as of June  30): $226.48 Million

Ryman Hospitality Properties Inc. (REIT) (NYSE:RHP) continued to remain GAMCO Investors’ largest small-cap holding and its second-largest equity holding overall at the end of June. Shares of the Tennessee-based real estate investment trust (REIT) have appreciated by over 10% since the end of June and are currently trading up by 4.3% year-to-date. Ryman Hospitality Properties Inc. (REIT) (NYSE:RHP) reported better than expected second quarter numbers last week, declaring EPS of $1.59 on revenue of $293.20 million, while analysts had called for EPS of $0.95 on revenue of $291.26 million. The REIT currently pays a quarterly dividend of $0.75 per share, which translates into an annual dividend yield of 5.55%. On August 3, analysts at Deutsche Bank reiterated their ‘Buy’ rating on the stock while setting a price target of $61 on it. Jay Petschek and Steven Major’s Corsair Capital Management also lowered its holding in the REIT during the second quarter, by 15% to 573,374 shares.

Disclosure: None