Gurus Mario Gabelli (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) may take different approaches to value investing, but they hold many of the same stocks in their equity portfolios. In addition, both investors will be speaking at the GuruFocus Value Conference in May.
Gabelli’s GAMCO Investors, which is based in New York, looks for investment opportunities among undervalued companies that have a catalyst.
On the other hand, Royce’s New York-based firm, Royce & Associates, specializes in small-cap companies. It picks stocks based on an active, bottom-up, risk-conscious and fundamental approach, looking for value opportunities among companies trading at a discount to enterprise value.
The sector the two gurus have their portfolios most heavily invested in is industrials. Gabelli has 29.18% of his equity portfolio invested in the space as of the fourth quarter, while Royce’s equity portfolio has a weight of 26.43%.
As a result, the Aggregated Portfolio found their largest common holdings in the industrials sector as of fourth-quarter 2018 were Aerojet Rocketdyne Holdings Inc. (AJRD, Financial), Mueller Industries Inc. (MLI, Financial), Graco Inc. (GGG, Financial), Herc Holdings Inc. (HRI, Financial) and Lincoln Electric Holdings Inc. (LECO, Financial).
Aerojet Rocketdyne
With a combined equity portfolio weight of 1.31% in the aggregate, Gabelli holds 5.12% of Aerojet Rocketdyne’s outstanding shares, while Royce holds 0.43%. They both trimmed their positions in the fourth quarter.
The Sacremento, California-based manufacturer of rocket and missile propulsion systems has a $2.79 billion market cap; its shares were trading around $35.52 on Friday with a price-earnings ratio of 20.42, a price-book ratio of 6.69% and a price-sales ratio of 1.44.
The Peter Lynch chart shows the stock is trading higher than its fair value, suggesting it is overpriced.
GuruFocus rated Aerojet Rocketdyne’s financial strength 5 out of 10. While it has adequate interest coverage, the Altman Z-Score of 2.07 indicates it is under some fiscal stress as a result of declining revenue per share over the last three years.
The company’s profitability and growth fared better, scoring a 7 out of 10 rating as a result of operating margin expansion, a high Piotroski F-Score of 7, which suggests conditions are healthy, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.
Gabelli is the aerospace and defense company’s largest guru shareholder. Other guru investors are First Eagle Investment (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Mueller Industries
Gabelli’s 7.57% stake and Royce’s 1.70% holding of Mueller Industries’ outstanding shares account for a combined weighting of 1.05% in the aggregate. Both gurus reduced their positions in the fourth quarter.
Headquartered in Memphis, Tennessee, the company, which manufactures copper, brass, aluminum and plastic products, has a market cap of $1.79 billion; its shares were trading around $31.60 on Friday with a price-earnings ratio of 17.32, a price-book ratio of 3.32 and a price-sales ratio of 0.74.
According to the Peter Lynch chart, the stock is overvalued.
Mueller’s financial strength and profitability and growth were both rated 6 out of 10 by GuruFocus. Supported by sufficient interest coverage, the Altman Z-Score of 4.80 suggests the company is in good fiscal standing.
Although the operating margin is in decline, it still outperforms 59% of competitors. Mueller Industries is also supported by strong returns, a moderate Piotroski F-Score of 6, which indicates operations are stable, and a one-star business predictability rank.
Gabelli and Royce are the company’s largest guru shareholders. Other gurus who hold the stock are Ken Fisher (Trades, Portfolio), Hotchkis & Wiley, Jeremy Grantham (Trades, Portfolio), Simons’ firm and Barrow, Hanley, Mewhinney & Strauss.
Graco
With a combined equity portfolio weight of 1.05%, Gabelli holds 1.48% of the company’s outstanding shares and Royce holds 0.30%. They both curbed their holdings in the fourth quarter.
The fluid-handling systems and equipment manufacturer, which is based in Minneapolis, has an $8.17 billion market cap; its shares were trading around $49.35 on Monday with a price-earnings ratio of 25.09, a price-book ratio of 10.96 and a price-sales ratio of 5.18.
Based on the Peter Lynch chart, the stock appears to be overvalued.
GuruFocus rated Graco’s financial strength 7 out of 10, driven by a comfortable level of interest coverage and a robust Altman Z-Score of 9.18.
The company’s profitability and growth scored an 8 out of 10 rating. In addition to operating margin expansion, it has strong returns that outperform industry peers, consistent earnings and revenue growth, a moderate Piotroski F-Score of 6 and a three-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 8.2% per year.
With 3.30% of outstanding shares, Mairs and Power (Trades, Portfolio) is Graco’s largest guru shareholder. Simons’ firm, Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) also own the stock.
Herc Holdings
Accounting for 1% of the aggregated equity portfolio, Gabelli has a 13.65% stake in Herc Holdings. Royce holds 2.10% of outstanding shares. Both gurus added to their holdings in the fourth quarter.
The Estero, Florida-based company, which rents and leases industrial equipment, has a market cap of $1.12 billion; its shares were trading around $39.25 on Friday with a price-earnings ratio of 16.50, a price-book ratio of 2.02 and a price-sales ratio of 0.60.
The Peter Lynch chart shows the stock is trading near its fair value.
Weighed down by approximately $2.2 billion in new long-term debt and poor interest coverage, Herc’s financial strength was rated 4 out of 10 by GuruFocus. In addition, the Altman Z-Score of 0.83 warns the company is at risk of going bankrupt.
The company’s profitability and growth fared much better, scoring a 7 out of 10 rating. Despite having a declining operating margin, Herc is supported by strong returns that outperform competitors and a high Piotroski F-Score of 7.
Of the gurus invested in Herc, Carl Icahn (Trades, Portfolio) has the largest stake with 15.76% of outstanding shares. Other guru shareholders are Arnold Schneider (Trades, Portfolio), Simons’ firm, PRIMECAP Management (Trades, Portfolio), Jones and Murray Stahl (Trades, Portfolio).
Lincoln Electric
Making up 0.91% of the aggregated equity portfolio, Royce has a 1.87% stake in Lincoln Electric, while Gabelli holds 0.17% of outstanding shares. Royce reduced his position in the fourth quarter.
The welding products manufacturer, which is headquartered in Cleveland, has a $5.28 billion market cap; its shares were trading around $83.65 on Friday with a price-earnings ratio of 19.10, a price-book ratio of 6.05 and a price-sales ratio of 1.81.
According to the Peter Lynch chart, the stock is overvalued.
Lincoln Electric’s financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. Although the company has issued approximately $349.8 million in new long-term debt over the last three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 5.87 also suggests the company is financially sound.
The company is also supported by strong margins and returns that outperform industry peers, consistent earnings and revenue growth, a moderate Piotroski F-Score of 6 and a three-star business predictability rank.
Royce is the company’s largest guru shareholder. Other top investors include Fisher, Pioneer, Greenblatt, Simons’ firm and Dalio.
Portfolio and performance
Additional industrial stocks the gurus both own as of the fourth quarter include Lindsay Corp. (LNN, Financial), Circor International Inc. (CIR, Financial), Hertz Global Holdings Inc. (HTZ, Financial), Watts Water Technologies Inc. (WTS, Financial) and Woodward Inc. (WWD, Financial), among others.
Royce’s $11.15 billion equity portfolio, which is composed of 1,143 stocks, is largely invested in the industrial and technology sectors. According to its fact sheet, the Royce Premier Fund returned -10.4% in 2018, outperforming the Russell 2000’s -11.01% return.
Gabelli’s $11.81 billion equity portfolio, which is composed of 779 stocks, is largely invested in the industrials and consumer cyclical sectors. According to GuruFocus data, the Gabelli Asset Fund posted a -7.69% return in 2018. The S&P 500 Index returned -5.97%.
As mentioned above, Gabelli and Royce, along with Spanish investor Francisco GarcĂ Âa ParamĂ©s, will be speaking at the 2019 GuruFocus Value Conference in Omaha, Nebraska. The conference will be held at the DoubleTree by Hilton Hotel Omaha Downtown on May 2 and 3. To view the full list of speakers, get more information or register, click here. Prices increase April 1, so hurry to get your tickets!
Disclosure: No positions.
