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Dilantha De Silva
Dilantha De Silva
Articles (133)  | Author's Website |

Mario Gabelli Turns Bullish on the US Economy

The guru recommends investing in a few struggling sectors

The strength of the American economy plays a major role in determining future investment returns. For this reason, investors need to monitor ongoing macroeconomic developments to gauge a measure of where the economy is headed.

Despite the significant challenges faced by global business activities, billionaire investor Mario Gabelli (Trades, Portfolio) believes that good times are ahead for the United States. In fact, the guru projects extraordinary growth in 2021. Speaking at the annual CNBC Financial Advisor Summit on Oct. 20, Gabelli said:

"In the U.S., I see extraordinarily good growth in 2021. That's because of a long runway for automobiles, a long runway for housing and I see some return of spending in commercial aviation."

Even though economic growth might turn out to be stellar in the next few years, certain business sectors are poised to remain under pressure. The key to successfully picking stocks to invest in in this environment is to use a top-down approach to identify industries that are setting up to head higher.

The guru backs these sectors

Gabelli's success over the years can be attributed to his keen ability to invest in companies that are out of favor among the majority of investors. Once, he famously said, "what we like to do is to buy, buy, buy when everyone doesn't want it." This statement shows the emphasis the guru places on investing in unloved business sectors, which can be categorized as a contrarian approach to investing in the stock market.

On Oct. 20, Gabelli highlighted a few sectors that he believes could deliver stellar returns to investors in 2021 and beyond.

  1. The automobile sector.
  2. Airline stocks and other travel names.
  3. Sports betting companies.

The view held by the guru may not come as a surprise to investors who have been following him, as all these business segments fit well into the "ignored" sections of the market currently.

Prospects for the travel sector

The airline industry is one of the hardest-hit segments of the economy, and even Warren Buffett (Trades, Portfolio) decided to divest his holdings in Delta Air Lines, Inc. (NYSE:DAL), American Airlines Group Inc. (NASDAQ:AAL), United Airlines Holdings Inc. (NASDAQ:UAL) and Southwest Airlines Co. (NYSE:LUV). The world virtually come to a travel standstill and is still recovering, so it's perfectly understandable why one of the best investment minds in the world would want to stay away from companies that are projected to bring in near-zero revenue in the foreseeable future. Contrarian investors, however, might want to look beyond the current challenges to gauge a measure of what the future holds for this industry.

A few silver linings have already appeared among the dark clouds. The checkpoint travel numbers released by the Transportation Security Administration reveal a significant uptick in the number of people passing through security terminals at airports in comparison to the lows reported in April. In a milestone achievement, total travelers per day surpassed 1 million on Oct. 18, which is the first time this happened since mid-March.

Source: Transportation Security Administration

Even though airlines have a long way to go to reach the activity levels seen during the previous years, a recovery is taking shape at a slow and steady pace. This could be one of the reasons why Gabelli is optimistic about the outlook for this struggling sector.

A closer look at industry data published by Reuters reveals that domestic air travel is gathering momentum faster than international travel, which is reasonable considering the quarantine rules introduced for travelers by many nations. For this reason, the best course of action for an investor is to pick an airline with a strong footing in the domestic market. As illustrated below, Southwest has been the clear leader in this segment over the last decade.

U.S. domestic air travel market share based on the number of passengers

Source: Statista

The improvement in numbers is likely to continue in the coming months as the global population learns to live with the threat of the pandemic. On the other hand, successfully developing a vaccine to fight the virus would certainly lead to a massive bump in the number of global travelers, and countries across the world can be expected to open their borders to tourists. Carefully evaluating whether an airline company is capable of surviving at least 12 more months in a zero-revenue environment will be key to success as there is no guarantee of when normalcy will prevail.

The macroeconomic environment for the cruise industry has stark similarities to that of the airline sector, and Mario Gabelli (Trades, Portfolio) would be proven right to back this battered sector if ships start sailing during the first half of 2021. The safest bet in this industry is Carnival Corp. (NYSE:CCL), in my opinion, as the company can survive with no revenue for an extended period because of the billions of dollars in debt raised in the last few months.

The depressed valuation levels of many travel and leisure companies arguably present lucrative investment opportunities, but due diligence is key to identifying the companies that can weather this storm.

The case for value investing

According to data from Reuters, growth stocks have outperformed their value peers by a considerable margin since 2008. The trillion-dollar market capitalization figures of tech giants such as Amazon.com Inc. (NASDAQ:AMZN) and Apple, Inc. (NASDAQ:AAPL) and the sky-high valuation multiples associated with high-tech companies such as Netflix Inc. (NASDAQ:NFLX) leaves no doubt regarding the type of companies that have dominated the market performance in the last decade.

The attractive opportunities associated with growth companies, however, might be coming to an end due to stretched valuation levels. On the other hand, value stocks that failed to entice investors and analysts are finally making a comeback. For instance, Morningstar analysts now believe that value stocks are considerably cheaper than their growth peers, which is a call for action for investors who have been waiting on the sidelines for better opportunities.

Source: Morningstar

Many prominent analysts and investment management institutes are beginning to notice the dispersion in valuation levels between growth and value stocks. In a note to clients sent in September, Bank of America (NYSE:BAC) analysts wrote:

"When valuation dispersion has been this high or higher, value stocks have outperformed growth 95% of the time over the subsequent 12 months."

The decade-long underperformance of value strategies might finally reverse in the coming months if the investing community pushes up the demand for the stocks of undervalued companies in the market.

Takeaway

Morningstar projects stellar economic growth in the next few years, and the expectations have been revised upward from the published numbers a year ago. This goes on to indicate their belief that low interest rates and the stimulus packages will go on to have a multiplier effect on the economic activities in the United States.

Source: Morningstar

The most attractive returns might come from unloved sectors according to Mario Gabelli (Trades, Portfolio), whose track record of investing in beaten-down sectors is stellar. Following this advice and investing in struggling sectors such as airlines and other travel and leisure companies could lead to stellar returns in the coming years. To hedge the risks involved with this strategy, I think the best course of action would be to diversify the investment portfolio to include a mix of value and growth stocks.

Disclosure: I own shares of Carnival Corporation.

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About the author:

Dilantha De Silva
I am an investment professional with 5-years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities.

I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, GuruFocus, and TradeGrill to produce investment-related content.

I'm a CFA level 2 candidate and an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK). During my free time, I enjoy reading.

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