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Mario Gabelli is definitely among my stock investing heroes. I consider him to be one of the greatest living stock pickers. His prodigious and unique stock-picking skills landed him a place on Forbes’ billionaire list. And this $1.5 billion fortune is 100% made from the financial markets. His investment company GAMCO manages over $40 billion and earns an average of 12% annually under his guidance.
Believe it or not, he talks freely about his research methods and investing philosophy. They are very simple, and any investor can easily apply them to their portfolio.
His ideas are built upon theories initially popularized in the book Security Analysis by Benjamin Graham and David Dodd way back in 1934. This book is still considered the “Bible” of fundamental analysis.
Gabelli adds a twist to the book’s theories by using a value investing approach to screen stocks. He uses Warren Buffett’s idea of buying stocks as if you are buying the company itself.
Then he adds his theory of private market value (PMV). Columbia Business School credits him with the creation of the PMV concept.
PMV is the value an informed buyer would pay to purchase an asset with similar characteristics. It is calculated by a study of assets both on and off the balance sheet, liabilities, and free cash flow. He then equates these numbers with actual transactions in similar businesses as a reality check. By focusing on companies that appear to be bargains relative to their PMV, he identifies upside potential plus a wide margin of safety.
Finally, Gabelli searches for a pending catalyst needed to ignite the stock price. Examples of catalysts include company- or industry-specific events such as a change in management, a spin-off, regulatory changes, or industry consolidation.
There is a very specific goal to the stock picking process. The goal is to locate stocks that have potential returns of 50% over the next two years.
The selling process is very regimented. Once a stock hits its PMV as determined earlier, or the pending catalyst fails to occur or fails to move the share price as expected, the stock is sold.
When many others are showing fear, Gabelli remains very optimistic about the future of the stock market. He said, “I have been saying the population would want a major change — take a poll of cab drivers anywhere, everyone feels angry — and would nominate and elect Trump. I am not voting for him necessarily, but I think Trump will do OK. Hillary Clinton will do OK too; we will survive either.”
Gabelli went on to state, “2017 could be a very good year for stocks, particularly if there’s tax reform.”
Here are 3 of his top stock picks for 2017:
Herc Holdings (NYSE: HRI)
Gabelli loves the infrastructure sector right now, and his favorite stock in the sector is Herc Holdings. Recently spun off from Hertz Rental Cars, Herc supplies rental equipment for infrastructure work. He strongly believes that infrastructure spending will ramp higher in places like Europe, Japan, and the United States.
This makes sense on several levels in the United States. First, President Trump has promised to greatly increase infrastructure spending. Second, this type of spending is tremendously needed. In the U.S. alone, 35% of the bridges in the country need repairs or upgrades.
Gabelli expects that the margins for Herc Holdings are on the way up and thinks the stock has the potential to triple.
T. Rowe Price (Nasdaq: TROW)
Mario Gabelli believes the financial sector will perform well in 2017 for several reasons.
Forecasts for U.S. economic growth are improving , inflation is expected to increase, and wages are slowly improving. Gabelli thinks these factors will increase lending activity and lift the entire sector.
Although GAMCO analysts recently downgraded estimates for T.Rowe Price, it remains one of its financial sector holdings. The stock is trading below both its 50- and 200-day simple moving averages with heavy technical support at $63.00 per share.
Textron (NYSE: TXT)
Mario is bullish on aerospace stocks going into 2017. Textron is a big player in the commercial aircraft business and recently bought giant Beechcraft Corp for $1.4 billion. Gabelli expects Textron to do well in the fighter jet trainer marketplace. He strongly believes that the United States has underspent on defense and the expects coming increases to help lift Textron and other defense stocks in 2017.
Risks To Consider: No one knows what the future holds. Be certain to use stops and trade within your risk parameters, even when shadowing great investors.
Action To Take: Apply Mario Gabelli’s stock picking tactics to your portfolio.