Twice a year, Barron’s gathers some of the top minds in the industry for a roundtable discussion on the worldwide investment environment and economic outlook. This year’s panel included the same regulars as usual, financial titans all, PIMCO’s Bill Gross, uber-bull Abby Joseph Cohen, GAMCO Investor’s (GBL) Mario Gabelli and Felix Zulauf. In addition to pontificating on the macro situation, all attendees were also asked to give over their top investment ideas. Barron’s keeps track of the results and here is the 2012 scorecard.
This week’s piece (it’s worth reading the entire thing) included picks from Mr. Gabelli, who has ‘never been more excited about specific stocks.’ More specifically, he thinks that investors ‘will be able to make a lot of money as a result of financial engineering — companies engaging in deals, takeovers, split-ups, spinoffs, and such.’ Sounds perfect for this site and his Top 10 list did not disappoint, featuring several spinoff or parent company names. This shouldn’t come as much of a surprise though given Mr. Gabelli’s event driven philosophy and one will often find GAMCO amongst the list of top spinco shareholders.
Mr. Gabelli’s first pick was Hillshire Brands (HSH), which came into existence when Sara Lee changed its name after spinning off its coffee assets. He believes the company is a market leader in several large and growing markets, has excellent management and is a highly attractive acquisition target. While the stock is currently trading at ~$30, he thinks it could rise to ‘$35 to $50 a share two years out’.
POST Holdings (POST) was another one of his top choices due to its strong cash generation ability, pricing power and excellent leadership in CEO Bill Stiritz. Mr. Gabelli thinks that the ‘sun, moon, and stars are aligned at Post,’ and that the company can grow EPS to $3/share within the next three or four years from the current expectations of $1.50/share. Ralcorp (RAH), POST’s parent company, is currently being acquired by ConAgra (CAG).
Another one of his top picks was Xylem (XYL), the water related spinoff from the ITT (ITT) conglomerate. While he expects some short term pressure given the troubles in Europe and declining municipal spending, he is a long term fan of the company. Here is what he had to say about the company:
There are 186 million shares. The company had $788 million of net debt as of the end of September, the latest published number. Revenue last year was an estimated $3.8 billion, which could rise to $4.6 billion by 2016. Ebitda could rise to $800 million from $625 million. Capital spending is about $130 million a year. Per-share earnings could go from $1.80 to $2.50. This is a yummy for a large corporation that wants to have distribution and products in water industry. Europe accounts for a third of the business; the U.S. is a third, and Asia-Pacific is 11%. They are accelerating their involvement in acquaculture [fish farming]. The company could be bought at a 50% premium to its current stock price within two years.
Not a bad showing for the spinoff space. Given the strong performance of both parent and spinoff companies, there is a good chance Mr. Gabelli will end up a winner. Barron’s and this site will certainly be keeping track.
Disclosure: Author holds no position in any stock mentioned.