Mario Gabelli, CEO of Gabelli Funds, says value investing has grown up

Legendary investor Mario Gabelli has made a name – and fortune — betting on the unloved.

Gabelli, chairman and chief executive officer of Gabelli Funds, the firm he founded in 1977, has remained committed to active value investing – which had fallen out-of-favor when passive-index funds and Nasdaq "FAANG" stocks were all the rage during the Federal Reserve's loose interest-rate policies.

Gabelli's broadcast media bets underscore his Private Market Value (PMV) method: For instance, Gabelli bought shares in Chris-Craft, which was eventually bought by News Corp. for $5.5 billion in the early 2000s, as well as Lin Broadcasting, which was sold to McCaw Cellular Communications in 1990.

Gabelli's PMV concept stems from Graham and Dodd's basic principle of finding stocks trading below their intrinsic value, with an added layer of Warren Buffett's style of attaching a premium for valuing a company as a whole.

Pensions & Investments caught up with Gabelli in August at his Greenwich, Conn., office to talk about the virtues of value investing, his firm's latest stock exposures and investing in sports teams.Questions and answers have been edited for style, conciseness and clarity.

A: What is different today? What you're doing is the following: You're doing fundamental research by seeing a company, reading the trade magazines, going out to conferences, going out to the competitors. You can't parachute in and see one company in the large industry and understand everything that's public about that company and how to anticipate change.

So today, we're going back to that promise, assuming you don't have some new type of pandemic or some other type of dynamic. So that's basic fundamental analysis.

How you gather data, however, how you gather the information and array it and then project it, has changed. The example I like to give is, somewhere about a couple of hundred years ago, a pigeon flew over and landed in London. The Rothschilds got it, went down to the floor, and they bought and sold stocks, and everybody thought that the Brits had lost the battle at Waterloo.

Now, AI is going to let you do it anywhere you want, and I'm going to look up ChatGPT and find out who (Jennifer Ablan) is, what her background is and what they think about you. So the world is changing in gathering information.

You also have to understand the tactics of the daily market. The Securities and Exchange Commission changed the uptick rule. You couldn't short a stock until it had an uptick. They eliminated that somewhere about 15 years ago.Secondly, you had the growth of ETFs. And then you had the growth of (momentum algorithms). And so the daily volatility, with no specialist, no uptick rule and all of this dynamic trading. And then you had the following, Wuhan and Robinhood. So individuals would sit at home who understood how to play Call of Duty and other games like that and then they would go on and trade stocks, and that became a daily, by the moment obsession, and you saw that unfold in things like meme stocks.

A: Oh, it's fantastic. We were in Nevada recently. We had the former governor, he's now the president of the University of Nevada, Reno. I said to somebody, prepare a speech that he would give to an incoming class. And they did it in two minutes (with the help of AI). Except that when we read it to him, he said, "Well, first of all, it's wrong on this. It's wrong on that." You still have to do fact-checking. It's just like any story you would write, you'd want somebody to do fact-checking.

It is no different than when 1840s England had something called Luddites. They would come along and try to destroy machinery because they were afraid of job (loss). One hundred and 20 years ago, you and I, in the United States, 80% would be farmers.John Deere is coming up with equipment that's precision agriculture and everything's going to be done remotely. You don't even have to get on your tractor anymore to figure out where to plant seed, where to plant the herbicide and do water precision. So things change, and we hope that we can accommodate those that are displaced and retrain them.

A: We think top-down all the time, but we don't invest that way. OK, will there be a recession? Will the Fed go to stay higher longer? Is inflation going to happen? What we want to understand is, is it a good company, with a good business, good management, and a reasonable price? So price is important to me. It's very hard for me to see a company with $800 billion market cap. How much can it grow over the next five years? I have been through these cycles.

You basically have to take a practical dynamic. What is a business worth? And that's what we try to do.

A: Oh, well, that's a great question. Where have we accumulated knowledge? An example would be the auto industry, because I started following it as a sell-side analyst 50 years ago. So I covered conglomerates, which benefited from cycles in the economy. I covered broadcasting and farm equipment, so I still like the ag world.

So take the ag world — three companies: John Deere, Case New Holland and AGCO.

The farmer in the United States is going to do about $545 billion of cash flow, crops, commodities, and a minor degree government payments. They are going to do quite well. Obviously, part of it is weather-related. Part of it is whether wheat is higher, the corn and corn is higher, the wheat or beans are higher. But the bottom line, the farmer's in good shape. What does the farmer need?

It's hard getting people to work in the fields, so you want to mechanize. An ideal world is to sit down like a drone operator and have that piece of equipment go on your 20,000 acres in Iowa, and look at the crop with lasers, and figure out whether there's a weed growing up. And hit it, as opposed to putting herbicide and pesticide down across the border of irrigation, do it on a precision basis. And you're going to see more of that precision ag, which allows the companies to have equipment to come in higher. And some of the models are changing. So we like Case New Holland. The stock is $14. There's 1.3 billion shares out. We think you'll make 50% in the next 12 months.

We think Deere is OK at $430. They've got 300 million shares, but it's got a $120 billion market cap. So we sometimes like the smaller company. AGCO is doing quite well, but we're focused on Case New Holland as an investment now. But we like the entire agricultural ecosystem.

The problem is that we have a crisis in the world, and that is food and water and energy. And the food crisis is exacerbated by the problems with getting grain out of the Ukraine and Russia.

And automobiles. We, in the world, have 1.3 billion cars. The United States has 285 million for 335 million people. China is only a fraction of that, with 1.4 billion people. The world will produce 81 million cars this year; 27 of those million will be in China, half of those will be EVs. So they are growing very rapidly. And understanding the technology of EVs — we as a world are understanding that. The holy grail for you and I is somebody at MIT coming up with fusion, somebody at the University of Hawaii coming up with it.

Independent of that, it's looking at a way to take water and make it energy. And you hope that somebody can do that, much like somebody found synthetic rubber or somebody found a vaccine for polio. These things happen, and American technology, and under the American free market system, hopefully will allow that to unfold at a very fast rate because you can't depend on parts of the world for precious materials and metals.From my point of view, you can't have an apartment building in the south Bronx and have an EV because you're not going to have a charger. You're not going to pay the price. The price of these vehicles have to come down sharply. In addition to that, you have to be able to not worry about a fire occurring with your lithium ion battery. You want to have longer range. You want to be able to charge it fast. But that's going to happen.

A: Great question, so batter up. Basically, we have a conference for the last umpteen years. And we have individuals that represent organizations that are owners of teams, or they sell limited partnership interest. So when you look at what is called football outside the United States, we call it soccer, there are three or four companies that are public, one of which is Manchester United. Then you look at sports in the United States like golf, and you have the Saudi Arabians, through LIV, looking to make investments.

Then you have baseball. Baseball kind of looks dull and boring, but they got this year a technology called a pitch clock. So you have to accelerate and shorten the game by a half hour. They are accelerating and shortening the game by a half hour, and that makes it more fan attractive.

Secondly, in the United States 18% of the population is Hispanic. That population's growing, and you have a significant number of baseball players that are Hispanic, so that you have a combination of a more interesting sport for a larger population, a very important segment of the population that likes the sport and has been playing it in their part of the world. And as a result of that, the ownership of teams are becoming more valuable all over again.

And the one (baseball team) that is public is the Atlanta Braves. The owners of that, their 60 million shares in the stock is selling at $40 odd dollars a share, 60 times 40 is $2.4 billion. And the land around their park, which is Battery Park, is more valuable than the debt on the land. So I'm buying a great franchise. The Atlanta Braves owners and the control group, John Malone, (Greg) Maffei and the management, are likely to look at optionality about how they can harvest it.So those are examples. And then you have transactions like the Washington Commanders, the football team, that basically just sold for $6.5 billion. So you kind of try to get benchmarks of what individuals are willing to pay, what do the Denver Broncos go for, and so on. And so we look at those benchmarks as to the valuations, but there's not very much you can do directly in sports.

A: Before the Screen Actors Guild and the Writers Guild went on strike, you're going to spend about $130 billion on content. I don't know what the number's going to be now, work in progress. And I don't know what AI is going to do on a going forward basis, but let's assume that number's that size.

The question is, how do you get a return on that, and which companies are going to do OK? While part of your business is declining, part of the business is booming.

From my end, I happen to like the little companies that have a shot at becoming big companies, or they were big companies and have a shot at regaining the premise, or the small companies that somebody outside the industry will buy.

Apple, last time I looked, has a $2 trillion market or whatever. So now I look at Paramount. They've got 670 million shares. The stock is $16 for the non-voting, and our clients own the voting stock. Let's call it $20 a share. Twenty times 600 is $13 billion. They'll have debt of $13 billion, so right now, I can buy the whole company at $20 (a share) for $25 billion.

Comcast is selling at about $280 billion. Disney, even at the low price with 1.8 billion shares, is at $100. They're $90, but let's call it $100, $18 billion plus the debt. So Paramount is the right size for someone, and CEO Bob Bakish is good management. He's getting the talent in there, and he's going to make it work.

Now, you asked me about CEO David Zaslav and Warner Brothers. Zaslav did a very good job at Discovery, OK? Shark Week, blah, blah, OK.

So I think Zaslav has a good sense of what it takes to create product. He's got a work in progress in terms of getting over some of the speed bumps. And the stock's OK at $14. You have approximately 1.4 billion shares. At $14, you're talking about a $35 billion market cap. Then on top of that, they've got $45 billion of debt. So it's a little bigger than Paramount. I think he'll pull it off. I think he got two years out. So I got probably a double in Warners and I got a four bagger if Shari Redstone wants to sell Paramount. Good luck, Shari. So those are the things we think about.