In this article, we reviewed the 10 best value stocks to buy right now according to value investor Martin D. Sass. You can skip our detailed analysis of Sass’ history, investment philosophy and hedge fund performance, and go directly to the 5 Best Value Stocks to Buy Right Now According to Value Investor Martin D. Sass.
Founded by Martin D. Sass, hedge fund MD Sass has been managing investors’ money since 1972, with the strategy of generating sustainable and market-beating returns. The firm believes in running a concentrated value portfolio, currently owning about 25 large and small stocks. The asset management firm seeks to invest in misunderstood and out-of-favor investment situations. Martin Sass, who worked in his father’s hardware store as a kid, gives significant importance to fundamental research to gauge the future prospects; he is not a believer in past performance. MD Sass has spread its investments across several sectors.
Sass’ Approach Towards Tech Stocks and Recent Portfolio Updates
Sass’ portfolio shows that the investor has been turning bearish on Facebook, Inc. Common Stock (NASDAQ: FB). His hedge fund slashed its stake in the company by 80% in the fourth quarter, ending the period with just 10,325 shares of the company, worth $2.82 million. On the other hand, the social media company is rising. Facebook, Inc. Common Stock (NASDAQ: FB) stock rose to all-time highs on April 29 after the company beat analysts’ estimates for Q1. Investment firm Truist Securities increased its price target for Facebook, Inc. Common Stock (NASDAQ: FB) to $400 from $350.
Facebook’s results soothed investors’ worries around a latest Apple iOS update that brings in new privacy changes which would impact Facebook, Inc. Common Stock (NASDAQ: FB)’s advertising practices.
Sass also decreased his stake in Comcast Corporation (NASDAQ: CMCSA) in the fourth quarter, entering 2021 with 55,200 shares of the media company, worth $2.9 million. Comcast is also in the limelight after beating Q1 estimates as the company added 380,000 subscribers for its cable TV division and 461,000 customers for its high-speed internet service.
But the real winner in the quarter was Comcast Corporation (NASDAQ: CMCSA)’s streaming service Peacock, which gained a whopping 42 million sign-ups (paid+unpaid). BofA maintained a Buy rating on the stock with a $69 price target.
However, as you will see in the article, Sass likes Alphabet Inc. (NASDAQ: GOOGL) and holds a notable stake in the company. This bet seems to be working as Alphabet Inc. (NASDAQ: GOOGL) shares have gained 36% year to date and 77% over the last 12 months. The stock is seeing a flurry of upgrades prior to Q1 results that are expected to beat analysts’ forecasts. The company reportedly saw a 25% year-over-year increase in paid click across its Google Network Properties and a 3% increase in cost per click in Q1, based on analysts’ estimates.
Barclays recently increased its price target for Alphabet Inc Class A (NASDAQ: GOOGL) to $3,000 from $2,500. The firm likes strengths in Google’s YouTube ads and search ads. Similarly, Evercore ISI recently upped its price target to $2,825, citing strong fundamentals.
According to the latest filings, Sass’ hedge fund held the biggest stake in the consumer discretionary sector followed by finance, communications, and healthcare. Martin Sass has been trimming his stake in the information technology sector over the past few quarters and the firm has been moving more funds towards materials, industrial, and real estate sectors.
Instead of holding a position for years and decades like Warren Buffett and George Soros, Martin Sass seeks to take advantage of short-term price movements. On average, his hedge fund holds a position in a stock for over 6 quarters while the average time held for the top ten positions is around just 3.30 quarters. The firm held positions in 33 stocks at the end of 2020 and its top ten positions represent 54% of the overall portfolio. MD Sass manages close to $1.4 billion in assets under management and its 13F portfolio market value stood around $466 million.
The firm sold out three stocks and reduced position in 14 stocks at the end of the December quarter to capitalize on pandemic-driven share price gains for certain companies. Moreover, his hedge fund raised its stake in companies that are likely to benefit from improving economic trends.
“I am religious about cash flow,” says Sass, “To me, it’s the most important number.”
Martin D. Sass’ Investment Philosophy
Martin Sass gives preference to companies that are generating robust cash flows. He says reported earnings numbers can be misleading. His hedge fund screens hundreds of companies that offer strong cash generation and then selects only the best among them with low multiples. The company’s cash generation potential always plays a big role in its future expansion strategy and in handling uncertain market environment. Cash flow is also a key factor when it comes to investors’ returns in the form of dividends and share buybacks.
Martin Sass suggests investors should understand the intrinsic value and other fundamentals before investing and then leave everything to the market. He worked for Argus Research and Neuwirth Management & Research, before founding his own firm in 1972. Sass completed B.S. in accounting from Brooklyn College and received an M.B.A degree from New York University. He has also been regularly contributing money to philanthropic activities. Mr. Sass is a Chairman and Co-Founder of a charity that works on fighting cancer through research, patient care, and education.
While Martin. D. Sass’ reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start digging into 10 best value stocks to buy right now according to value investor Martin D. Sass.
Best Value Stocks to Buy Right Now
10. Mohawk Industries, Inc. (NYSE: MHK)
Value: $22,106,000
Percent of Martin Sass’ 13F Portfolio: 4.73%
No. of Hedge Fund Holders: 39
The home furnishing products manufacturer Mohawk Industries Inc (NYSE: MHK) is a member of the MD Sass stock portfolio since the first quarter of 2019. The firm’s position in Mohawk Industries contributed strongly to its 2020 and first-quarter returns. Mohawk Industries’ share price grew 137% in the last twelve months. Economic reopening and easing social distancing policies are likely to support Mohawk Industries’ stock price momentum in the days ahead.
Hedge funds were in a bearish mood. The number of bullish hedge fund bets decreased by 2 in recent months. Mohawk Industries was in 39 hedge funds’ portfolios at the end of December compared to 41 positions in the previous quarter.
9. NRG Energy, Inc. (NYSE: NRG)
Value: $23,031,000
Percent of Martin Sass’ 13F Portfolio: 4.93%
No. of Hedge Fund Holders: 31
An integrated power company NRG Energy, Inc. (NYSE: NRG) is on the list of 10 best value stocks to buy right now according to value investor Martin D. Sass. His firm has been holding a position in power company since 2016. MD Sass looks bullish over the future fundamentals of NRG Energy, Inc. (NYSE: NRG) . The firm raised its stake in NRG by 10% in the December quarter to 4.93% of the overall 13F portfolio. NRG offers more than a 4% dividend yield to investors.
The number of long hedge fund positions was trimmed by 1 recently. NRG Energy was in 31 hedge funds’ portfolios at the end of the fourth quarter of 2020 compared to 32 positions in the prior quarter.
8. Bausch Health Companies Inc. (NYSE: BHC)
Value: $23,459,000
Percent of Martin Sass’ 13F Portfolio: 5.02%
No. of Hedge Fund Holders: 43
Shares of mid-cap pharma Bausch Health Companies Inc. (NYSE: BHC) rallied 56% since the beginning of this year, extending the twelve-month gains to 85%. MD Sass first initiated a position in Bausch Health Companies in 2018 and the firm raised its stake by 11% during the December quarter of 2020. The company’s strategy of selling non-core businesses added to investors’ sentiment in recent months. The appointment of the new CEO Paul Herendeen has also been applauded by investors.
Bausch Health Companies has experienced an increase in support from the world’s most elite money managers lately. It was in 43 hedge funds’ portfolios at the end of December compared to 41 positions in the previous quarter.
In one of their investor letters, Chou Associates Management highlighted a few stocks and Bausch Health Companies Inc. (NYSE:BHC) is one of them. Here is what Chou Associates Management said:
“In early August, Bausch Health Companies Inc. announced that it is planning to spin off its eye care business, Bausch + Lomb, into an independent publicly traded company. This will allow the company to concentrate on its gastroenterology, aesthetics/dermatology, neurology and international pharma business.
Chairman and CEO Joseph Papa said, “We’ve looked at the value of our pure health companies like Alcon and Cooper and believe that Bausch + Lomb would compare very favorably when investors have an opportunity to make a judgment about the relative value of the stand-alone business”.
Comparables like Cooper Companies and Alcon Inc. are currently trading between 18 and 20 times EBITDA. If Bausch + Lomb trades at similar multiples as a stand-alone company, the total value of Bausch Health using sum-of-the-parts method, net of debt, should be worth north of $35 per share, as an inference. For a long time we have felt that Bausch was undervalued, but the investors were not giving credit that management has done a good job in running the operations, selling non-core assets, as well as de-leveraging its balance sheet. They felt the process was too slow, we hope the spin-off of Bausch + Lomb unit will be the catalyst that is needed for investors to price the company closer to its intrinsic value.”
7. LKQ Corporation (NASDAQ: LKQ)
Value: $24,940,000
Percent of Martin Sass’ 13F Portfolio: 5.34%
No. of Hedge Fund Holders: 50
MD Sass has raised its stake in auto parts distributor LKQ Corporation (NASDAQ: LKQ) by 21% during the December quarter to 5.34% of the overall portfolio. It is among the 10 best value stocks to buy right now according to value investor Martin D. Sass. Shares of LKQ are benefiting from economic reopening. Its stock price rallied close to 30% year to date, extending the twelve-month gains to 90%. LKQ Corporation distributes replacement parts, components, and systems used in the repair and maintenance of vehicles.
In their fourth quarter investor letter, Bonsai Partners highlighted a few stocks including LKQ Corporation. Here is what Bonsai Partners stated:
“LKQ is the largest provider of alternative collision and mechanical automotive parts in the United States. In Europe, they are the leading distributor of general automotive maintenance parts and supplies. Its shares appreciated 27.1% during the quarter.
LKQ reported reasonably healthy third-quarter results, with revenues nearly flat year-over-year. This is quite remarkable considering ~9 months ago when we first considered buying LKQ Corporation (NASDAQ: LKQ), I didn’t know if the company would potentially trip its debt covenants and run into liquidity issues due to steep revenue declines. These issues appear well behind us now.
Given the serious tail-risk concerns when we first acquired the position, we cheaply hedged with put options; the only time we’ve ever done so. These options recently expired worthless and it never felt so good to lose money.
The company seems back on track to execute its strategy of streamlining its operations, and management used COVID as a catalyst to rationalize the business and improve service levels. Fortunately, LKQ’s business is counter-cyclical, so it stands to benefit from economic stresses if they are yet to come.”
6. AmerisourceBergen Corporation (NASDAQ: ABC)
Value: $25,012,000
Percent of Martin Sass’ 13F Portfolio: 5.35%
No. of Hedge Fund Holders: 47
Shares of AmerisourceBergen Corporation (NASDAQ: ABC) outperformed the broader market index so far in 2021 on the back of improving fundamentals. The healthcare products distributor accounted for 5.36% of the MD Sass 13F portfolio at the end of December. The firm first initiated a position in AmerisourceBergen during the second quarter of 2020. In addition to share price gains, the company offers a dividend yield just shy of 1.50%.
AmerisourceBergen Corporation (NASDAQ: ABC) has experienced an increase in enthusiasm from smart money recently. It was in 47 hedge funds’ portfolios at the end of the fourth quarter of 2020 compared to 45 positions in the previous quarter.
