With stocks setting new all-time highs this week, legendary value investor Mario Gabelli shared three of his top picks for the second half of 2014.

"The market—based on earnings, based on multiples, based on valuations—is OK, but there's no margin of safety, and you can have a shock," he said Thursday on CNBC's "Halftime Report."

Gabelli, who oversees $48 billion in assets as CEO and chairman of the Gabelli Funds, took into consideration potential risks in equity markets.

"The shock could come out of a faster rise in interest rates on the day it happens because the economy's getting better," he said, adding that geopolitical risks also lie in Syria, Crimea and Iraq. "There's a lot that can go wrong, but there's a lot that go right."

With that in mind, Gabelli selected three "I" stocks he's holding:

"Interpublic, run by Michael Roth, who's done a terrific job," he said. "Consolidation, because of economics, in the advertising business."

Gabelli's second pick was International Game Technology—"not as well run and a company that has some suitors looking at it, good cash flow," he said. "They hired a banker to look at alternatives, which means somebody was knocking on their door, which is not inappropriate, given the lackluster focus on the management team."

Lastly, he liked a longtime holding of his, IFF.

"And then a company that has a substitute in what I call the health-and-wellness theme, and that is a substitute for salt and sugar. Hard to get details, and it's a company that I liked, and we've owned it for a long time, International Flavors and Fragrances. They're going through a management change. You're talking about a company with 80 million shares of $100 stock, $5 in earnings."

—By CNBC's Bruno J. Navarro