Billionaire investor Mario Gabelli (Trades, Portfolio), leader of New York-based GAMCO Investors, disclosed his third-quarter portfolio earlier this week.
With the goal of generating long-term capital appreciation, the renowned guru and his team search for opportunities among undervalued stocks that have a catalyst for growth.
Keeping these criteria in mind, Gabelli entered 55 new positions, sold out of 43 holdings and added to or trimmed a slew of other investments during the quarter. Notable trades included the divestment of El Paso Electric Co. (EE, Financial), reductions in the Honeywell International Inc. (HON, Financial), Sony Corp. (SNE, Financial) and Quidel Corp. (QDEL, Financial) positions and a new holding in Momenta Pharmaceuticals Inc. (MNTA, Financial).
El Paso Electric
Gabelli sold his 855,812 remaining shares of El Paso Electric, impacting the equity portfolio by -0.65%. The stock traded for an average price of $67.46 per share during the quarter.
GuruFocus estimates he gained 29,197.68% on the investment.
The Texas-based utility company, which provides electricity to West Texas and southern New Mexico, has a $2.79 billion market cap; its shares were trading around $68.40 on Tuesday with a price-earnings ratio of 34.2, a price-book ratio of 2.39 and a price-sales ratio of 3.29, which GuruFocus notes are all approaching 10-year highs.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.
GuruFocus rated El Paso Electric's financial strength 4 out of 10. As a result of issuing approximately $213.3 million in new long-term debt over the past three years, the company has poor interest coverage. In addition, the low Altman Z-Score of 1.38 warns it could be in danger of going bankrupt.
The company's profitability scored a 6 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6, which indicates business conditions are stable. As a result of revenue per share declining over the past three years, the predictability rank of one out of five stars is on watch. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% annually over a 10-year period.
Of the gurus invested in El Paso Electric, Jeremy Grantham (Trades, Portfolio) has the largest holding with 1.89% of outstanding shares. Hotchkis & Wiley, Prem Watsa (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also own the stock.
Honeywell International
With an impact of -0.21% on the equity portfolio, the guru trimmed his position in Honeywell by 20.82%, selling 126,504 shares. Shares traded for an average price of $157.6 each during the quarter.
He now holds 481,030 shares total, which account for 0.88% of the equity portfolio. GuruFocus data shows he has held the stock for over a decade.
The industrial conglomerate, which is headquartered in Charlotte, North Carolina and produces highly engineered products like turbine propulsion engines, auxiliary power units and navigation systems, has a market cap of $139.98 billion; its shares were trading around $200.19 on Tuesday with a price-earnings ratio of 28.62, a price-book ratio of 7.74 and a price-sales ratio of 4.29.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 aligns with this assessment since the share price, price-book and price-sales ratios are all approaching 10-year highs.
Honeywell's financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately $5.2 billion in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The high Altman Z-Score of 3.77 also indicates the company is in good shape. It is also generating value for shareholders as the return on invested capital surpasses the weighted average cost of capital.
The company's profitability fared even better, scoring an 8 out of 10 rating on the back of an expanding operating margin and strong returns that outperform a majority of industry peers. Honeywell also has a moderate Piotroski F-Score of 5, but the three-star predictability rank is on watch as a result of revenue declining over the past 12 months. GuruFocus says companies with this rank return, on average, 8.2% annually.
With a 0.17% stake, Mairs and Power (Trades, Portfolio) is the company's largest guru shareholder. Other top guru insiders include Diamond Hill Capital (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Grantham, Jim Simons (Trades, Portfolio)' Renaissance Technologies, David Carlson (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio).
Sony
Continuing his selling trend, the investor curbed the Sony stake by 9.66%, or 234,437 shares. The trade had an impact of -0.18% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $77.65.
Gabelli now holds 2.19 million shares of the company, representing 1.87% of the equity portfolio. According to GuruFocus, he has gained 258.81% on the investment so far.
The Japanese company, which manufactures a variety of consumer electronics, has a $106.1 billion market cap; its shares were trading around $86.18 on Tuesday with a price-earnings ratio of 12.24, a price-book ratio of 2.24 and a price-sales ratio of 1.39.
Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 3 out of 10, however, leans more toward overvaluation.
GuruFocus rated Sony's financial strength 6 out of 10. Despite issuing approximately 677 billion yen ($6.42 billion) in new long-term debt over the past three years, it is still at a manageable level due to a comfortable level of interest coverage. The weak Altman Z-Score of 0.97, however, warns the company could be in danger of bankruptcy. The WACC also eclipses the ROIC, suggesting value is being destroyed.
The company's profitability scored a 5 out of 10 rating on the back of operating margin expansion, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. As a result of revenue declining over the past five years, however, Sony's one-star predictability rank is on watch.
PRIMECAP is Sony's largest guru shareholder with a 2.7% stake. Steven Cohen (Trades, Portfolio), Simons' firm, Caxton Associates (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Pioneer also have positions in the stock.
Quidel
Impacting the equity portfolio by -0.14%, Gabelli reduced the Quidel holding by 15.64%, selling 54,600 shares. During the quarter, the stock traded for an average price of $222.17 per share.
He now holds 294,500 shares in total, which make up 0.72% of the equity portfolio. GuruFocus says the guru has gained 648.52% on the investment so far.
The San Diego-based manufacturer of diagnostic testing products has a market cap of $8.41 billion; its shares were trading around $200.47 on Tuesday with a price-earnings ratio of 23.48, a price-book ratio of 9.89 and a price-sales ratio of 8.68.
The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 3 out of 10 aligns with this assessment.
Although assets are building up at a faster pace than revenue is growing, GuruFocus rated Quidel's financial strength 8 out of 10 on the back of comfortable interest coverage and a robust Altman Z-Score of 15.76.
The company's profitability scored a 6 out of 10 rating, driven by strong margins and returns that outperform a majority of industry peers. Quidel also has a moderate Piotroski F-Score of 6 and a one-star predictability rank.
With a 0.7% holding, Gabelli is the company's largest guru shareholder. The Vanguard Health Care Fund (Trades, Portfolio), Caxton, Joel Greenblatt (Trades, Portfolio) and Pioneer also have positions in the stock.
Momenta Pharmaceuticals
In his largest purchase of the quarter, Gabelli picked up 332,667 shares of Momenta Pharmaceuticals, allocating 0.19% of the equity portfolio to the position. During the quarter, shares traded for an average price of $41.42 each.
Headquartered in Cambridge, Massachusetts, the biotech company, which focuses on developing novel therapies to treat rare, immune-mediated diseases, has a $6.24 billion market cap; its shares were trading around $52.48 on Tuesday with a price-book ratio of 15.75 and a price-sales ratio of 189.46, which GuruFocus noted are all nearing 10-year highs.
According to the median price-sales value chart, the stock is overvalued.
Momenta's financial strength was rated 6 out of 10 by GuruFocus, driven by a comfortable level of interest coverage as well as a robust Altman Z-Score of 25.75.
The company's profitability did not fare nearly as well, scoring a 2 out of 10 rating on the back of declining margins and negative returns that underperform a majority of competitors. It also has a low Piotroski F-Score of 3, which indicates operations are in poor shape, and has recorded declining revenue per share over the past five years. Regardless, Momenta still has a one-star predictability rank.
Of the gurus invested in Momenta, Ainslie has the largest stake with 1.95% of outstanding shares. Other top guru shareholders are Andreas Halvorsen (Trades, Portfolio), Simons' firm, Primecap and Ken Fisher (Trades, Portfolio).
Additional trades and portfolio performance
Other new holdings Gabelli established during the quarter included PMV Consumer Acquisition Corp. (PMVC.U, Financial), Rosetta Stone Inc. (RST, Financial), Immunomedics Inc. (IMMU, Financial), Aimmune Therapeutics Inc. (AIMT, Financial) and Varian Medical Systems Inc. (VAR, Financial).
The guru's $8.79 billion equity portfolio, which is composed of 839 stocks, is most heavily invested in the industrials sector with a weight of 31.15%, followed by smaller positions in the communication services and consumer cyclical spaces.
According to GuruFocus data, the Gabelli Assset Fund Class AAA returned 22.43%, underperforming the S&P 500 Index's return of 31.48%.
Disclosure: No positions.
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