GAB: Despite 15% Price Loss, This High-Yielding CEF Isn’t Undervalued

~ by Snehasish Chaudhuri, MBA (Finance)

Gabelli Equity Trust Inc. (NYSE:GAB) is a closed ended equity mutual fund (CEF) launched by GAMCO Investors, Inc. This CEF is managed by Gabelli Funds, LLC. The fund primarily invests in value stocks of companies across diversified sectors primarily in the US equity markets. 17.3 percent of its total assets are invested in equity markets outside the US. The fund uses a bottom-up stock picking approach to create its portfolio. In the Bottom-up investing approach, these funds analyze individual stocks, not the industry or economy, and de-emphasizes the correlation of macroeconomic conditions and market cycles. GAB seeks to benchmark itself against the performances of the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite Index. It has lost more than 15 percent of its value in the stock market in the past 12 months. Still, the fund doesn’t seem to be undervalued at present.

Gabelli Equity Trust Generated Consistent Double-Digit Yield and High Return

Gabelli Equity Trust Inc. has an asset base of $1.6 billion, and has a relatively high expense ratio of 1.37 percent. Almost 63 percent of its assets are invested in equities from four sectors – financial, healthcare, industrial, and information & communication technology (ICT). It has a portfolio turnover rate of 12 percent. I expect these four sectors to generate higher-than average growth in the coming decade, due to technological revolution and increased need of healthcare. The fund was formed in August, 1986, and has been paying quarterly dividends for the past 33 years. Over the past 10 years, GAB generated double-digit yield on a consistent basis. This itself is lucrative enough for GAB’s investors. Historically, GAB generated strong returns, too.

Top Holdings of Gabelli Equity Trust is Part of its Portfolio for a Long Time

Gabelli Equity Trust’s major investments in healthcare, industrial, financial and ICT sectors included Mastercard Incorporated (MA), Berkshire Hathaway Inc. (BRK.A), Rollins, Inc. (ROL), American Express Company (AXP), Texas Instruments Incorporated (TXN), IDEX Corporation (IEX), Honeywell International Inc. (HON), Curtiss-Wright Corporation (CW), AMETEK, Inc. (AME), UnitedHealth Group Incorporated (UNH), Republic Services, Inc. (RSG), Waste Management, Inc. (WM), Xylem Inc. (XYL), S&P Global Inc. (SPGI), and Steel Partners Holdings L.P. (SPLP). Interestingly, each of these stocks generated positive price growth in excess of 25 percent during the past 5 years. UNH, SPGI and SPLP grew in excess of 100 percent. Over the past 15 years also, their price growth has been very high. I have hardly come across a fund, top investments of which have performed so well over the long run.

Significant investments in the remaining sectors included Swedish Match AB (OTC:SWMAY), Costco Wholesale Corporation (COST), Archer-Daniels-Midland Company (ADM), Deere & Company (DE), Yakult Honsha Co, Ltd. (OTCPK:YKLTF), Genuine Parts Company (GPC), O’Reilly Automotive, Inc. (ORLY), Diageo plc (DEO), PepsiCo, Inc. (PEP), and ConocoPhillips (COP). Performances of these stocks over the past 5 years are not bad either. Barring DEO and YKLTF, all other stocks generated a price growth in excess of 25 percent. Again, over the past 15 years, they had a strong price growth. This suggests that stock selection of this fund has been quite good. An important thing to note is that, barring XYL, SPGI and SPLP, all other stocks are part of GAB’s portfolio for 15 to 20 years. This provides an idea about how focussed this portfolio is. Even XYL was first incorporated in its portfolio almost 11 years back, and SPLP almost 7 years back.

Despite Recent Price Loss, GAB Is Far From Being Considered Undervalued

Despite various hiccups in the broader market, Gabelli Equity Trust Inc. has done extremely well over the last 15 years. Between 2016 and 2021, average annual total return stood at around 17.2 percent. The fund recovered well from pandemic time market low and was trading at $7.15 in the beginning of 2022. However, it has come down below $6 in the past 12 months. This price loss was expected as the valuations went too high prior to that. Between March 2020 and January 2022, GAB’s price was almost doubled.

Despite a price loss of more than 15 percent during the past 12 months, GAB is still trading at a price to earnings (P/E) of 14.15, and Price to book (P/B) of 1.81. Price to Sales (P/S) and Price to Cash Flow (P/CF) are at 1.26 and 7.24, respectively. All these price multiples of GAB are quite at par with its peers, and can no way be termed as undervalued. The fund is currently trading at $5.8, a discount of 7.25 percent from its NAV. In my view, the fund is not undervalued, and thus it’s not the proper time to accumulate this fund.

Investment Thesis

Gabelli Equity Trust Inc. invested its asset base of $1.6 billion in large-cap stocks primarily in the US market. In my opinion, it is a less risky fund, and has a strongly diversified portfolio. Almost 63 percent of its assets are invested in equities from four sectors – financial. healthcare, industrial, and ICT – sectors that are expected to generate higher-than average growth in the coming decade. Most of GAB’s top investments, including those in other sectors are part of its portfolio for as high as 15 to 20 years. During this period, these stocks generated positive price growth that also for a very high degree. Its annual average total return over long term has also been very high. Such a return has been possible due to consistent double digit yield generated by this fund. It is obviously a very good investment option for income-seeking investors. However, that does not mean investors should rush for this fund.

Gabelli Equity Trust Inc. has a relatively high expense ratio of 1.37 percent. But, this is not a big concern, since the return is strong even after adjusting for such high expenses. The prime concern lies in its valuation. The fund is currently trading at $5.8, a discount of 7.25 percent from its NAV. And, despite a price loss of more than 15 percent during the past 12 months, GAB is still trading at a price multiples that are par to its peers. In my view, the fund is not undervalued, and thus it’s not the proper time to accumulate this fund. Price of GAB was much lower six months back, and considering the current macroeconomic situation further price loss is quite likely. Investors must capitalize on those opportunities on a timely basis. However, the yield is attractive enough and existing shareholders must hold back their investments and enjoy the pay-outs as well as price growth over the long run.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.