3 New Buys From Acadian Asset Management for 2013

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my article today, I have picked up three stocks from the portfolio of Acadian Asset Management LLC that were recently bought by this hedge fund. It manages around 13 billion in stocks with more focus on to the service sector. The below mentioned three companies belong to three entirely different sectors with one common factor - they all have their long term fundamentals intact. Let's look at each of these stocks in detail. 

<table> <tbody> <tr> <td> <p><strong>Companies</strong></p> </td> <td> <p><strong>Last 6m stock movement (~)</strong></p> </td> </tr> <tr> <td> <p>Southwest Airlines</p> </td> <td> <p>28%</p> </td> </tr> <tr> <td> <p>Grupo Financiero Santander S.A.B. de C.V.</p> </td> <td> <p>27%</p> </td> </tr> <tr> <td> <p>Brookfield Office Properties Inc.</p> </td> <td> <p>-1%</p> </td> </tr> </tbody> </table>


Southwest Airlines (NYSE: LUV)

First pick from the Acadian's Portfolio is the leading low cost carrier, Southwest Airlines. I consider 2013 and 2014 highly important ones for the company as the company’s complete integration with AirTan will be completed. The company is gearing up its integration process and is targeting to finish it in 2014 rather than 2015. I feel this integration could have a modest impact on profits in 4Q12 results, but definitely would pay off well in 2013 -14. The whole process includes joint network optimization by 1H13, joint reservation system to be put in place by the end of 2013 and complete integration by the end of 2014. Via this integration, I expect a synergy of ~$400 million for the company in 2013.

Also, in 2012 Southwest announced three revenue based initiatives for 2013 to boost up its top-line growth. Those were as follows:

  • The network optimization which includes increasing flights during peak hours and reducing during off-peak hours.
  • Selling preferred positions, increasing the existing fees etc
  • A new origin and destination based revenue model 

Each of these initiatives is expected to add ~$100 million to the company's revenue in 2013. These steps will further help the company to achieve its target of increasing its ROIC to ~15% (up from 7%) in 2013. Apart from this, on the long-term basis the company will be benefited with the ~$100 million expansion of Hobby airport to start international flights. In the mid of 2012, the company got the regulatory approvals to start operating international flights and will start these flights by 2015. This expansion would help the company to compete against United Airlines on the Latin American and Caribbean routes which lack competition. I feel, Southwest Airlines is a safe bet by Acadian and makes a good investment opportunity for the investors.

Santander Mexico (NYSE: BSMX)

Last year in September, one of the largest banks in Spain Santander, announced the spin off of its Mexican operations through an IPO. The spin off resulted in a new company in Mexico which gives a win-win situation to both the existing as well as the new investors. Grupo Financiero's stock price saw an increase of ~25% since the launch, a welcoming sign for the new company. Moreover, the strong economic and regulatory conditions in Mexico would further support the credit growth. Mexican economy remains as one of the most attractive regions with an expected annual growth rate of ~5% for the next two years. The credit penetration in Mexico is still at the lower side; therefore I expect a loan CAGR of around 16% in the upcoming three years. This significant growth in Mexico would be a positive catalyst for this company, as it is the most cost-efficient player in the economy. I expect the company to achieve an EPS growth of ~20% annually in 2013 & 14. This would further push its stock price with around 20% upside potential in 2013.

Brookfield Office Properties (NYSE: BPO)

Another addition in Acadian fund is a good dividend payer Brookfield Properties. The company has an average dividend yield of ~4.3% for the last five years and a forward annual dividend yield of ~3.3%. I feel this is due to its consistent earnings growth based on its strong portfolio of assets. Most recently the company started one of the largest development projects 'Manhattan West' for ~4.5 billion. The project is scheduled to be completed in 2014 and would be ready for rent in 2016. However, the company is already negotiating the pre-leasing agreements with various prospects for the site. The project will include two office towers, one residential tower and some retail space. I view this as a favorable investment for the company looking at the site's location and the improving office market conditions in the US.

On the less positive side, the pending vacancy at the World Financial Centre is an issue for Brookfield. The company has a ~3.1 million square feet of leasing gap that can impact its cash flow for FY12. To fill the gap the company announced ~$250 million of renovation at the site. The renovation aims at building a shopping destination by converting the retail and public space. Moreover, the centre will be renamed as Brookfield Place in 2013.

On the whole, I remain neutral on Brookfield's stock in the short run. I would like to see more visibility at the World Financial Centre for further rating upgrade. However, in the long run its office portfolio will drive above average growth in the next 2-3 years. 

To sum it up, I feel Southwest Airlines and Grupo Santander would be perfect opportunity for the investors for the near-term gains in 2013-14. On the other hand, Brookfield would be safe bet for a long-term investment. 

madhudube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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