Usually the whole is greater than the sum of its parts — not to investment guru Mario Gabelli.
The CEO of Gamco Investors told CNBC Monday he wants to invest in companies that have a history of splitting off successful businesses, or could split off businesses, and then invest in both companies.
“What we do is not complicated,” he said. He looks at the world and wonders what it's going to look like over the next 10 years “and then we do stock analysis covering sectors globally.”
The mantra of the 1960s was conglomeration, but today the focus is on growth, he said.
“How do you take a company and take its capital and move it to its highest rate of return? Split-ups are an example of that,” Gabelli said. “We look at finding the company that was spun off and say, is this attractive?”
Case in point: Fortune Brands, whose stock Gabelli bought going on 40 years ago when it was the American Tobacco Co. It eventually became known as Fortune Brands. Then it started splitting off businesses before eventually dividing itself into Fortune Brands Home & Security and Beam Inc., maker of Jim Beam bourbon.
Gabelli said when the Berlin Wall came down he knew there would be more consumers coming into the market and, he added, the Chinese like their bourbon. So that was a sector he found attractive.
As for the housing part of the company, he said, “We said housing is at the bottom. The company is doing well at the bottom of a cycle. What can it do as the cycle improves?” That’s why Gabelli “bought both pieces.”
Another example is Xylem, spun off from ITT and involved in maintaining a constant clean water supply as part of the natural gas drilling known as hydraulic fracturing. There’s no fracking without water, so Gabelli wanted in.
Gabelli also looks for the potential splits. PepsiCo’s CEO, Indra Nooyi, has said she does not plan to spin off the soda giant’s snacks business to compete against Kraft Foods, which did split off its snacks division.
Gabelli said he is not pushing for a split, saying Nooyi is refocusing the advertising budget, reducing costs, and putting millions of dollars into PepsiCo’s brands.
“If that works, you have a stock that’s 20 points higher anyway,” he said. If it doesn’t work, Gabelli said, there's a “fallback position — I’ve got two CEOs who can run the separate companies. Pepsi has a history of spin-offs. They’ve done it before.”
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Mario Gabelli or his company own shares of the companies mentioned.