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GAMCO (112% Profit in 13 months)

‘Value’ investing strategies have experienced their longest period of underperformance vs the S&P 500 index since 2006. GAMCO Investors, Inc. (GAM), controlled by the celebrity investor Mario Gabelli, earns fees running several value-oriented funds including 24 mutual funds, 16 closed end funds, and 1,700 institutional and private wealth management accounts.

Although the funds have beaten the S&P500 since inception in 1977, 14.7% net of fees vs 11.8% according to management, recent performance has lagged – 21.3% in 2019 vs 31.5% for the index.

This, along with the relentless competition on fees from index funds has driven assets under management (AUM) down to $27.5bn on March 31st 2020 from $43bn just over two years ago. Large declines in AUM in Q1 2020 were due to stock market declines as a result of Covid-19 but client redemptions have been significant over the recent past.

GAM earns investment advisory fees (as a % of AUM), performance/conditional fees (on outperforming benchmarks), and distribution fees (as a % of AUM). Only $1.4bn in AUM was subject to performance fees. Therefore, an overwhelming proportion of revenue is dependent on AUM.

In the most recent twelve months GAM generated $304m in revenues, $125m in operating earnings before taxes (excluding market gains/losses), and $73m in net earnings. GAM had a net cash balance of $54m.

The equity is selling for $320m or about 4x earnings.

Most costs are variable compensation costs, which should provide some protection when AUMs and revenues decline. Further the ten largest clients accounted for only 9% of AUM, suggesting good client diversification.

There are minimal capital expenditure requirements – therefore, practically all the earnings are available for common stockholders. Though dividends were minimal at $2.8m last year, repurchases amounted to $37.4m. Combined, this represented a shareholder yield of over 12% in 2019.

The board has authorized $30m in repurchasing firepower and the common stock was purchased near the current market price of $11 per share.

Gabelli controls 92% of the voting power of GAM via class B stock (10 votes to 1 of the class A), but he does have a knack of repurchasing stock at bargain prices.

At 20%+ earnings yields - when the company’s incremental borrowing rate is 5% - and juicy repurchase yields, investors can afford to have the AUMs drop significantly, even from current depressed levels, before calling into question the safety of this investment.

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