5 value stock picks from Mario Gabelli's shop

The investment guru's ace pickers think these stocks are worth well more than their current price.

By MSN Money Partner May 5, 2011 11:15AM

Forbes.com on MSN MoneyImage: Investment building blocks (© Comstock Images/Jupiterimages)By Gene Marcial, Forbes Street Beat

 

The name Mario Gabelli is famous, not only for his family of mutual funds, but also for his prowess in consistently picking stock winners. And his core tream of stock pickers at the Gabelli mother ship, Gamco Investors, are similarly equipped with the ability to spot smart investment opportunities.

 

Gabelli’s basic investing principle is simple but difficult to achieve: Buy shares of solid companies that are selling below their private market or intrinsic value. One fundamental puzzler is how to determine the private value or intrinsic worth. Gabelli, of course, has his own proprietary method for valuing stocks.

 

Among Gabelli’s array of ace stock pickers is a group called Focus Five, led by Daniel Miller, which courageously selects five stocks every quarter that should outperform the market in a significant way, based in part on identifiable near-term catalysts. The team’s performance record is impressive: Each quarter they beat the market averages, and since the Focus Five’s inception on Jan. 31, 2006, its stock bets have advanced a whopping 227.6%, handily outscoring the Standard & Poor’s 500-stock index’s meager gain of 3.8%.

 

The team’s stock picks for the current quarter are quite diverse. They include a poential takeover target, a couple of restructuring bets -- one of which could lead to splitting the company -- and plays on soft-drink bottling and the rising demand for freight trucks.

 

Here are the value picks from Gabelli's Focus Five team:

 

Ascent Media (ASCMA), which provided content and creative services to major motion picture studios, independent producers, and broadcast networks, is 30% owned by Liberty Media Chairman and CEO John Malone. The company recently restructured and sold most of its media assets and acquired Monitronics, a home-security company which is now its main focus. Ascent Media has a cash stash of $260 million and real estate assets worth $60 million, plus significant tax-loss opportunities. The Gabelli group is focusing on a potential recapitalization of Monitronics or possibly another acquisition idea from the acquisitive Malone. Now trading at $47 a share, the company’s private market value is estimated by the Gabelli analysts at $65 a share.

 

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Coca-Cola Enterprises (CCE), which is now Coca-Cola’s largest bottling partner in Western Europe, is the world’s third largest independent bottler. It sold its North American operations to Coca-Cola Co. in 2010. Gabelli’s analysts expect the company will generate $3.7 billion of free cash flow through 2015, a large of portion of which might be used to repurchase shares. Miller also figures the bottler may purchase Coca-Cola’s German bottling operations. Now trading at $28 a share, the stock’s intrinsic value is in the high $30s, estimates Miller.

 

CVS  Caremark (CVS), a leading operator of retail drug-chain stores and pharmacy benefit management services in the U.S., is trading at $36 a share, which is a discount to its peers, because of problems at its Caremark unit. Caremark’s business posted a net contract loss of nearly $5 billion in 2010, and suffered a big decline in operating margins. The catalyst for the stock to go higher, says Miller, is a comprehensive restructuring of Caremark, which might lead to splitting the company. A split should lift CVS’s stock price, says Miller, who puts the sum-of-the-parts value of the stock, now trading at $36 a share, at $52.

 

Navistar (NAV), which makes commercial trucks, diesel engines, and buses, is benefitting from a rise in demand for freight trucks, as well as a  jump in fleet utilization. Part of the increase in demand is due to the aging fleet of commercial trucks now on the road. Many transportaton companies have been buying new trucks to replace the old ones. Navistar has been taking meaningful measures, says Miller, to streamline its operations aimed at focusing more on the recovery of  truck demand in North America.

 

"Navistar will be the greatest beneficiary of the improving market conditions as it’s the most levered to the North American market among the major publicly traded truck manufacturers," says Miller.

 

Yahoo! (YHOO) is potentially a hot takeover candidate. One of the largest providers of internet content and search services, Yahoo could end up being acquired by the likes of Microsoft (MSFT) or any of the cash-laden private equity managers, says Miller. Here is part of the reason why Yahoo is cheap and would be an enticing target: its cash hoard and minority stakes in Chinese conglomerate Alibaba Group and Yahoo! Japan represent at least $13.60 a share in value, or 80% of Yahoo’s current market worth. Based on the value of these assets, Yahoo, now trading at $18, is attractively priced, says Miller. His price target for the stock is $23.

 

In sum, Gabelli’s Focus Five analysts are making it easy for investors to grab investment opportunities while they are underpriced. Skeptical? The Gabelli team’s record of stellar performance  should speak for itself.

 

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