Fund manager of $2 billion portfolio unveils 9 favorite stocks

Gabelli Asset Management, founded by the legendary money manager Mario Gabelli, represents a classic value-investment firm.

One of the firm’s flagship funds is Gabelli Equity Trust  (GAB) , an all-capitalization value mutual fund with $2 billion in assets. It’s a closed-end fund, which means it’s listed on an exchange (the NYSE) and trades throughout the day.

The fund returned an annualized 0.35% for the past year, 3.49% for the past three years, 8.4% for the past five years, and 7.7% for the past ten years.

Macrae Sykes, a portfolio manager for Gabelli Funds, shares his favorite stocks with TheStreet.


Gabelli's Investment Philosophy

We recently spoke with one of the fund’s managers, Macrae Sykes, who also manages Gabelli Financial Services Opportunities ETF  (GABF) . He discussed his investment philosophy and cited some of his favorite stocks.

Gabelli Equity Trust takes a bottom-up investing approach, which has led it to financial services, sports teams, and aviation stocks, Sykes explained.

Related: Veteran fund manager picks 3 top value stocks for 2024 What’s your investment philosophy?

Sykes: We look for companies trading at a discount to intrinsic value, where there’s a catalyst to narrow that gap in valuation. We’re not just looking for cheap stocks. We want durable, competitive businesses with management teams that have an entrepreneurial mindset to capital allocation, customer engagement, and operational excellence. What are some of the themes you have been drawn to as value investors?

Sykes: Financial services, the No. 2 sector in the fund, is uniquely positioned. It has companies with large moats and compelling long-term growth. [Moats are durable competitive advantages.]

One example is Interactive Brokers  (IBKR) , an online securities brokerage. It has annual new client growth of 20% and 70% operating profit margins. Its fundamental output is technology, but it trades at only 15 times earnings [much less than many tech companies]. What are other areas of financial services that you favor?

Sykes: One is global payments. It’s growing 8% a year, thanks to economic growth and innovations away from cash and checks. We like American Express  (AXP) , which is growing faster than 8% because of its engagement with younger cohorts and small and medium-sized businesses.

There’s also insurance. It’s a feast-or-famine business [given the unpredictable need for payouts]. Better-run companies are benefiting from higher premiums, and inflation has elevated their asset values. In addition, higher interest rates have provided insurers higher yields on their investments.

One we like is WR Berkley  (WRB) , which primarily underwrites commercial casualty insurance.

More Wall Street Analysts: Do you want to discuss one more financial segment that you like?

Sykes: The alternative investment space [which includes everything from private equity to hedge funds]. An endowment like Yale University’s has more than 25% of its portfolio in alternatives, but the average private-wealth [extremely rich] client has less than 1%.

With investors holding a total of $100 trillion in assets globally, a small shift in appetite for alternatives could be pretty dramatic.

Alternative-asset companies Apollo Global Management  (APO) , Blackstone  (BX)  and KKR  (KKR)  are well positioned. We are seeing a nice run rate for asset gathering and deployment of capital. We see this as a trend for at least the next few years. What are some other themes you find attractive?

Sykes: We have a long-term interest in sports teams. Teams are limited resources, and their prices have appreciated [sharply over the past 30 years]. It’s a transparent business to value. Meanwhile, the outlook is strong for sports viewership and participation.

We like Madison Square Garden Sports  (MSGS) , which owns the New York Knicks and Rangers, and we like the Atlanta Braves  (BATRK) . The Braves shares are trading around $40 and could be worth $50. The asset value isn’t reflected in today’s price. Can you give us one more stock pick?

Sykes: FTAI Aviation  (FTAI) , which buys and leases aerospace assets, focusing on engines. Demand for air travel is up after Covid. Airlines are keeping planes in the air longer, so they have to swap out engines.

Lease rates for engines have gone up dramatically. That has provided a huge boost in earnings for FTAI. The company has worked on solutions for shop visits, improving efficiency of engine maintenance and lowering costs.

With the trouble at Boeing, people don’t want to hear about aviation companies. But derivate benefits to FTAI from growth in aviation are significant.

The author owns shares of Blackstone.

Related: Veteran fund manager picks favorite stocks for 2024

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