Something about the $1.8 billion portfolio steered by Mark Tavel stands out: no technology stocks. "Technology shares don't look attractive," says the chief investment officer at Rothschild Asset Management.
In place of technology, Tavel has been snapping up airlines, some of which he thinks will be highfliers this year. His top choice: AMR (AMR), parent of American Airlines, serving 300 cities worldwide. AMR is just what Tavel looks for--an undervalued company with a possible catalyst that could produce an earnings bonanza. This strategy has boosted Rothschild Asset's performance: Its Large-Cap Value portfolio scored a gain of 38.1% in 1997--beating the Standard & Poor's 500-stock index' 33.4% and the Dow Jones industrial average's 22%.
At 123, AMR is still at the midpoint of its trading range, notes Tavel, and its price-earnings ratio is a modest 10, based on estimated 1998 earnings. Tavel figures AMR deserves a p-e of 12, which would imply a share price of 150. Samuel Buttrick of PaineWebber expects AMR to earn $13.30 a share in 1998, up from 1997's $10.64. The stock rose more than 40% last year.
AMR is benefiting from higher fares, rapid growth in traffic--particularly business travelers--and lower oil prices. Fuel accounts for 10% to 12% of AMR's costs, he notes. So with crude prices having fallen from $20 a barrel to $17, AMR's margins have improved, prompting some to raise earnings estimates. Prospects are good for higher fares, too, especially for nonbusiness passengers, says Tavel, as the strong economy lets more people take trips.
There's always the risk that new political trouble in the Middle East could jack oil prices back up. But, argues Tavel, "the airlines are always ready to raise fares when the price of oil soars."
One catalyst that Tavel thinks could give earnings a lift is AMR's link with British Airways. Both carriers are trying to persuade the European Commission to O.K. a proposed transatlantic venture that would let them combine operations. "The alliance will eliminate a lot of duplication that could trim overall costs and improve efficiency," Tavel says.