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Super Mario's Top Trends
07/01/2014 9:00 am EST
Dubbed "Super Mario," Mario Gabelli founded Gamco Investors over four decades ago. He has quietly grew Gamco into one of the largest investment firms around, overseeing $47 billion in assets, observes Marshall Hargrave in Daily Profit.
In a recent Barron's interview, Gabelli outlined his top stocks for the second half of 2014. His focus is on strong trends in the market. Here are Gabelli's top three investment themes for the rest of 2014:
1. Mario likes China's rising middle class
Gabelli believes that Boeing (BA) will be one of the biggest benefactors of the rising middle class in China and India. He notes that, with a rise in the middle class, there will also be a rise in the demand for travel.
Boeing has one of the best returns on invested capital in the industry at 20%. Its dividend yield is a decent 2.2%. It has $7.5 billion left on its buyback plan as of the end of the first quarter. That's good enough to reduce its shares outstanding by 8%.
Boeing should continue to benefit from a growing demand of commercial airlines, as companies look to upgrade to fuel-efficient aircraft. Boeing saw its net orders up $19 billion last quarter, with its total backlog coming in at $440 billion—putting its backlog at over four times its market cap. That total backlog represents about seven years of production.
2. Mario likes fracking in the shale plays
Gabelli's best play in the fracking energy space is Weatherford International (WFT). This company also happens to be one of Gabelli Funds' top ten holdings. Weatherford is an equipment and servicer for drilling and production of oil and natural gas wells.
Gabelli notes that Weatherford could finally be in turnaround mode, after having resolved its tax accounting issues and government investigations. Now the company can focus on its core businesses, while reducing debt. As part of this, it is divesting non-core assets.
Weatherford believes it could generate roughly $500 million in free cash flow this year. That would be a big milestone considering Weatherford hasn't generated free cash in a number of years.
Shares are near their 52-week high, but Weatherford still only trades at a P/E ratio of 13.4, based on next year's earnings estimates. It has $3.5 billion backlog of work. North America accounts for right at 60% of the company's operating income.
3. Mario likes organic and natural foods
Gabelli Funds owns a small position in Whole Foods Market (WFM), which, by all accounts, is one of the top plays in the organic foods industry. Shares are down 27% year-to-date, versus an S&P 500 index (SPX) that's up 5%. This comes as Whole Foods is seeing increased competition in the organic foods market.
But Whole Foods' new stores are still performing well. As of last quarter, stores that are less than two years old saw comparable store sales growth of 18.6%. Whole Foods expects to grow its pipeline of stores from the current 374 to 575 in fiscal 2018.
The company is a leading retailer in a fast growing market, has a top-notch balance sheet, and is now trading at one of the cheapest levels we've seen over the last few years. Its P/E ratio is 28 and right at the lowest level in five years.
After the pullback, Whole Foods could be an appetizing buyout target. Wall Street believes that Publix could be interested in buying up Whole Foods. Its dividend yield is 1.1%. The company has virtually no debt and net cash of nearly $3. That covers around 7% its market cap.
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