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A ground crewmember prepares to push back an American Airlines Boeing 737-823 jet at a terminal at Miami International Airport.
Martin D. Sass' stock picks for his participation in the inaugural Squawk Box Portfolio Challenge are trades in three popular sectors: airlines, pharmaceuticals and asset management.
Since founding his firm 42 years ago, the CEO and chairman of M.D. Sass has kept the same strategy of focusing on stocks with low valuations and an upcoming tradable catalyst.
Based on Sass' research, here are his recommendations:
- Of the three big legacy carriers, the airline is the most leveraged to lower jet fuel cost, with no hedges or profit share, giving it a meaningful fuel cost advantage over peers.
- The stock will also strongly benefit in 2015 from structural improvements in the firm's operations, in addition to more traditional merger synergies.
- Our purchase of the airline in 2013 at $18 a share was based on our expectation that the industry would strengthen through consolidations and restructurings under appropriate constraints.
- The upcoming acquisition of Allergan's long duration assets in the best areas of health care will help drive organic earnings-per-share growth of 12 percent annually vs. 9 percent for peers, yet Actavis is trading at a large discount to peers.
- The stock was bought in 2010 at $44 a share when it was called Watson Pharmaceuticals. We believed the global generic pharmaceutical industry was undergoing a positive transformation phase. The shift towards generics and consolidation with acquisitions were driving value creation and scale, providing negotiating strength as opposed to huge purchasing entities.
- Actavis is an undervalued mega-cap pharmaceutical (with a surge in market capitalization from $18 billion in 2013 to a pro forma market capitalization of $110 billion) with the acquisition of Allergan.
- Apollo is a recent purchase in hedge funds at a cheap valuation of under 10 times estimated earnings, with an attractive 10 percent yield.
- This leading alternative investment manager with top-tier private equity fund performance will likely double assets under management to $250-$300 billion or more, driven by both credit and real estate over the next 3-5 years.
- The stock is a new pick and is well-positioned to deploy substantial liquid assets for attractive returns by capitalizing on the collapse in oil prices and forced sales of assets by European banks. I expect growing distressed credit investment opportunities in 2015 and long-term growth opportunities in credit and international markets.
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