Mario Gabelli on Private Market Value and Evaluating Investments

“Always keep your portfolio and your risk at your own individual comfortable sleeping point.” —Mario Gabelli

Mario Gabelli, Chairman and CEO of GAMCO Investors, Inc., joined the 18th episode of Wall Street Week, where he talked about, among other things, his view on private market value and how to evaluate investments.

Transcript below is my own.

Gabelli on Private Market Value

Gary Kaminski: You pioneered this idea of intrinsic private market value idea of investing. What does that mean in terms of looking at businesses?

Mario Gabelli: Well, that’s a great question. It basically go back to when I started the firm. I would sit down and write a great idea on a great stock, and somebody would say: “I buy any stock.” So I came up with the idea, saying look if a company is publicly trading, what is it worth if you and I chipped up to buy it? At the time it was called both strap financing, which became leveraged buyouts which is private equity today. So we talked about if a company is publicly traded, what would it be worth if it went private, that is private market value. What will make us surface the value? The spread between what it’s trading for, and what’s it’s worth. And one of the first reports we wrote on that subject was a company in Buffalo, New York, called Hodai [not really sure if I got the name of the company correct], and Henry Kravis picked the price, the stock was $23, I think it was $25 don’t hold me to that, I said it was wort 37 to 39. Henry Kravis buys it, and that was a good example.

Gary Kaminski: So the idea, just so that the viewer understands. So if you we’re using your money to buy a business to get it as a publicly traded entity, it’s a privately owned business, it generates revenues, it has earnings, you’re borrowing money to basically buy that business. You’re trying to figure out at what point you can get an acceptable rate of return for buying that business, total enterprise value.

Mario Gabelli: Right, in today’s terminology, forty years later it would be what would private equity pay to buy a public company to take it private, knowing full well as strategic, that is a corporate buyer having synergies right, would pay more.

Gabelli on Evaluating Investments

Anthony Scaramucci: We’ve know each other for a long time. I’ve seen you take a piece of paper and write down a couple of numbers, and on a back of an envelope make a decision on a stock. Tell viewers how you are capable of doing that.

Mario Gabelli: Well, there’s a little of hard work. It’s like that fellow Jordan sinking a put with a lot of pressure, just missing by one and winning a tournament. You just basically gather the data, rate the data, project the data, interpret it. Then communicate it, but that’s our culture. It’s really the notion of compounded knowledge, accumulated knowledge of a specific industry. Wall Street would call that, Buffett would call that, the core competency. What’s our circle of competence, what’s the value of a business. So you take something as simple as yoghurt. You gather the data on a global basis. How big is the yoghurt market? How big is the U.S. yoghurt market? What are the trends and consumption of yoghurt? Who is producing your good? Who would want to be in the production of yoghurt? What’s good about yoghurt? And then look at the company, you look at General Mills and you read the annual report, you read the chairman’s report, you go to the balance sheet first, not the income statement, balance sheet. And then we go…

Anthony Scaramucci: Why go to the balance sheet?

Mario Gabelli: Because we like to see what’s the downside.

Gary Kaminski: So it’s once again accounting as the language of business. You look at companies, you look at businesses.

Mario Gabelli: The question is how can I predict as an analyst, as a portfolio manager, as a business guy. How can I predict five years from now with somebody would be willing to pay for my cash flow for that company.

Click on image below for the 18th episode of Wall Street Week with Mario Gabelli.

WSWMG1

To learn more about Mario Gabelli, check out Value Walk’s Mario Gabelli’s Resource Page.

Go here for annual reports from Gamco Investors.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

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