This 'intrinsic value' small-cap stock strategy keeps benefiting from deep research

Gabelli took over as the portfolio manager of the Keeley Small Cap Fund after Gabelli Asset Management acquired Chicago-based Keeley-Teton Advisors in May 2025. He told MarketWatch that he still consults with Nicholas Galluccio, who was the portfolio manager of the fund from 2008 until Gabelli took over. Gabelli also noted he had been working with Galluccio since 2009, since both had been members of the team managing the Teton Westwood Mighty Mites Fund WEMMX, which was subadvised by Gabelli. Gabelli is still part of the management team for the Mighty Mites fund, while Galluccio has stepped down from that role.

Joseph A. Gabelli is a nephew of Mario Gabelli, the founder and CEO of Gabelli Asset Management. Joseph A. (whom we will continue to refer to as “Gabelli”) said he had started to work at Gabelli Investment Management while still attending high school, handling clerical tasks and “helping with the website.”

He didn’t take an immediate interest in the investing industry, he said. Majoring in English at Boston College “was not necessarily the path typical for someone getting into financial services,” he noted. “But I continued to work at the firm as a gopher.”

Gabelli said that over time, he developed an interest in investing and that he had worked ”every job” at the firm — including “trading, sales, marketing and manning the phones.” After completing his M.B.A. at Columbia Business School, he joined Gabelli Asset Management full time in 2008, initially as an analyst. Gabelli said all portfolio managers at the firm also work as analysts covering specific sectors or industries. He covers consumer staples, housing and “some communications infrastructure,” he said.

Private market value

Gabelli described “private market value with a catalyst” as a philosophical strategy that had been developed and taught by Mario Gabelli at Columbia Business School, and which “compares Buffett’s intrinsic value with a control premium.”

So this is “the price an informed buyer would be willing to pay for an arm’s-length transaction,” he said, adding that he and his colleagues “look for a catalyst that will close that discount within 18 months.”

‘The opportunity for small cap, in active management, has never been bigger.’ — Joseph A. Gabelli, portfolio manager of the Keeley Small Cap Fund

Gabelli said that five of the Keeley Small Cap Fund’s holdings had been acquired over the past 12 months, “with average premiums of more than 35%.” But he stressed that a variety of catalysts could unlock value, even for companies that weren’t clear targets for acquirers. Catalysts might include regulatory changes, “financial engineering” such as stock repurchases or spinoffs, a change in management or industry consolidation.

So far this year, the Russell 2000 Index — by consensus, the small-cap benchmark — has returned 20.1%, doubling the return of the S&P 500 according to FactSet.

“This is the first year in a decade in which you have seen small caps outperform — we are in the early innings of that dynamic,” Gabelli said. He also emphasized the importance of in-house research in the small-cap space, because “there is a large number of companies not followed by the universe outside our four walls.”

“The opportunity for small cap, in active management, has never been bigger,” he added. “You have a combination of a significant number of small-cap companies in indexes that don’t make money, some with business models that are moonshots.”

The Keeley Small Cap Fund typically buys shares of companies with market capitalizations ranging from $100 million to $2.5 billion at initial investment. The fund held 85 stocks at the end of the first quarter. There is some overlap between the fund’s holdings and those of the Teton Westwood Mighty Mites Fund, which typically buys shares of companies with valuations of up to $500 million at initial purchase.

Here are some examples of companies held by the Keeley Small Cap Fund that Gabelli discussed:

The largest holding of the fund is Anterix which has a market cap of $2.1 billion. According to Gabelli, Anterix is “the largest holder of 900 MHz spectrum in the U.S.” He said the company had “bought up spectrum and converted it to its higher use — mainly building high-speed networks for corporate customers who want to avoid being exposed to the internet.”

An important catalyst for Anterix and its stock has been the Federal Communications Commission’s ruling in February that expanded the amount of 900 MHz spectrum that the company could use. “They have the equivalent of 10 MHz of spectrum, where before they had 6 [MHz],” Gabelli said. He estimates that Anterix is trading as if the value of its spectrum were discounted by 30%, at a time when competing service providers are scrambling to build out new high-speed services.

SpaceX completed a $17 billion deal to purchase spectrum from EchoStar in May. Amazon.com agreed in April to acquire Globalstar in an $11.6 billion deal expected to be completed next year. And Rocket Lab agreed in June to acquire Iridium Communications in an $8 billion deal that is also expected to be completed in 2027.

All of this leads Gabelli to see 50% upside for Anterix’s stock from here.

Gabelli mentioned TTM Technologies as an example of a company well positioned to take advantage of two broad themes that investors are excited about. “On the one hand, this is the largest North American manufacturer of printed circuit boards,” he said. But the company also makes electronics used in radar systems and missile components. During the first quarter, 42% of the TTM’s net revenue was derived from its aerospace and defense segment. Top customers in that segment include RTX Lockheed Martin Northrop Grumman L3Harris Technologies and Boeing

TTM is not necessarily a takeout candidate, Gabelli said. The Keeley Small Cap Fund has held TTM for more than five years, and the stock has more than doubled this year. “Given that they have both this exposure to rapidly growing areas of the tech space and a large backlog for their defense business, which is also growing rapidly, you can argue the stock does not appear expensive,” he said.

For an example of a stock trading at a valuation below the sum of its parts, Gabelli named Arko a convenience-store operator with a market cap of $890 million that is held by the Keeley Small Cap Fund and within the Mighty Mites portfolio.

Gabelli said Arko had been rolling up hundreds of convenience stores (mostly combined with gas stations) before it changed its strategy about a year ago to trim its store count a bit and improve the stores’ operations. In February, Arko publicly listed its subsidiary Arko Petroleum which is a wholesale fuel distributor that includes most of Arko’s convenience stores as customers. Arko owns 79.6% of Arko Petroleum’s common shares.

Arko Petroleum “essentially makes a fixed spread on the gas that it sells, and pays that out as a dividend,” Gabelli said. The stock closed at $21.21 a share on Tuesday. On May 11, when it announced its first-quarter results, Arko Petroleum declared a dividend of 26 cents a share, but said that was only to cover the period from the initial public offering completed on Feb. 13 through the end of the quarter. In that same announcement, Arko Petroleum said it planned to pay a quarterly dividend of 50 cents going forward, “with an expected annual dividend rate of $2.00 per share.” That makes for a dividend yield of 9.43%, based on Tuesday’s closing share price.

Typically when investors see such a high dividend yield, they expect the dividend to be cut. But Gabelli said the stock price had been held back because “given the newness of this company, it is not understood by the market.”

”When Arco looks to monetize their retail business, they will renegotiate their agreement with Arco Petroleum,” he said. And once the Arco Petroleum split-off becomes more of “an arm’s-length transaction,” Arco Petroleum’s stock “can easily go from $20 to $30,” Gabelli said.

He expects Arco itself eventually to be sold. It now trades at a valuation of five to six times Ebitda, according to Gabelli’s estimate, when transactions for that type of retail operator “are typically in the eight to 10 band.”

“It is pretty easy to see a scenario in which they can sell and create a lot of value for Arco and Arco Petroleum shareholders,” he said.

Top holdings

Here are the Keeley Small Cap Fun’s top 10 holdings as of June 30:

Performance against peers

For peer comparisons, LSEG calculates one-year total returns and average annual total returns for three-, five- and 10-year periods through the most recent month-end. The data provider lists 95 mutual funds as peers to the Keeley Small Cap Fund that are also benchmarked to the Russell 2000 Value Index

The Keeley Small Cap Fund’s institutional share class has annual expenses totaling 1% of assets under management, which makes for $100 in annual fees for a $10,000 investment. So the fund’s net expense ratio is 1%, but its full expense ratio is 1.41%. There is a temporary reimbursement of 0.41% of expenses until at least Jan. 31, 2027. There are other funds on the list below with temporary waivers of portions of their expenses. Before you make any investment, make sure you understand exactly how the expenses work and when any waivers might be lifted.

The following performance comparison begins with the Keeley Small Cap Fund, then the iShares Russell 2000 Value ETF an exchange-traded fund that tracks the performance of the fund’s performance benchmark index. Then there is the iShares Russell 2000 ETF which tracks the full Russell 2000 Index. Then there are the five peer funds with the highest five-year annual returns, among those available currently for direct purchase by new investors. All returns are through June 30, include reinvested dividends and capital-gain distributions, and are net of expenses and net of any sales charges. The funds’ net expense ratios are in the right-most column.

For one year through June 30, the Keeley Small Cap Fund’s 67.9% return ranked highest among the 96 mutual funds listed by LSEG as peers also benchmarked to the Russell 2000 Value Index.

Among the five peer funds that are open to new investors and listed above, only the Brandes Small Cap Value Fund BSCMX had a higher three-year return than that of the Keeley fund, while the Brandes fund and the Reinhart Genesis PMV Fund RPMFX came in ahead for five years.

The Keeley Small Cap Fund’s 10-year average return of 15.7% compared with respective average returns of 10.7% for IWN and 11.5% for IWM. The Keeley fund also had the highest 10-year return among the 96 peer mutual funds, except for the Invesco Small Cap Fund VSCAX. This Invesco fund is not on the above list because it has been closed to new investors since April 2024.