With bigger companies looking to grow, many may look to acquire smaller firms. That's one of the reasons Mario Gabelli, chairman of Gamco Investors, sees opportunity in small-cap equities.
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"How do you make money? Spinoffs, split-ups, liquidations, mergers and acquisitions," Gabelli told CNBC on Wednesday.
With this as a framework, in the small-cap space, Gabelli said he likes alcoholic beverage makers, with the potential to be taken over. He pointed out Beam, which was spun off from Fortune Brands .
For investors looking for a larger acquisition target, Gabelli suggests Patterson . The company has three main businesses, dental supplies, veterinarian supplies and rehabilitation supplies.
"Here's a company that was plodding along," Gabelli said. "Earnings haven't gone up. All of a sudden, they're buying back stock, things are starting to get brighter. And so what's the value of the company if someone takes it up?"
Gabelli noted that there are 160 million cats and dogs in the country and Americans are spending more money on their pets.
The investor owns about 1.5 million shares of Patterson and bought some Tuesday after it dropped $3. "We'd like to have it cheaper," he added.
He also pointed to garage door maker Griffon . While it won't see much benefit from rebuilding after Hurricane Sandy, the company could split into pieces. "Financial engineering is a way to make money as well," Gabelli said.
Other small-cap stocks Gabelli highlighted include Pep Boys, Superior Industries, Smart Balance, Endo Pharmaceuticals and Tredegar .
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