In this article, we take a look at some of the top stock picks from David Abrams’ portfolio.
David Abrams founded Abrams Capital Management in 1999 after working for Seth Klarman for 10 years who described him as “smart as a whip”. Abrams, who graduated in History, says the beginning of his investment career was accidental but said he didn’t want to adopt anything else as a profession afterwards.
David Abrams’ Investment Philosophy
Abrams believes in value investing which he described in a 2008 interview to be the “E=mc2” of investing strategies, that is, the lower the price, the less risk and more return you have. Abrams is so committed to value investing that he doesn’t care whether or not there’s growth prospects in a stock as long as it is trading at a discount.
In a podcast titled, Value Investing With Legends, Abrams said the following:
“If we buy things with what we call a ‘hard catalyst’, an event that is going to close the gap between where we bought it and what it’s worth, we don’t need that much growth. We need to buy it cheap and get out. Where there is no catalyst, we absolutely need growth.”
Abrams invests without any leverage and believes that his biggest investment lesson is that his investments be unlevered. He said in the same podcast that he studies financial disasters and marginal leverage was one of the reasons for 90% of the financial disasters he had assessed.
Abrams’ investments have a long-term horizon but at a public address for Project Punch Card in 2018, he said he believed investors that have horizons as long as 20 years have a flawed approach and there has to be a point sooner than 10 years when you know whether you’re winning or not. In this regard, Abrams Capital Management puts a three to five year timeline on stocks and looks for a minimum of 15% return on its purchase.
In addition to fundamental analysis, he prefers companies with good pricing power as well as ones where management owns the company’s stock and creates value..
The fund has invested in a wide variety of financial instruments like domestic and foreign equity securities, debt securities, distressed securities and private equity. Abrams Capital Management is staffed with a small team of investment analysts and David Abrams personally approves all trades.
Abrams Capital Management
Abrams Capital Management has $10.8 billion in assets under management as of the first quarter of 2022. The fund is primarily invested in services, industrial goods, technology, basic materials, healthcare and financial industries.
Some of the prominent stocks in its portfolio include Alphabet Inc. (NASDAQ:GOOGL), TransDigm Group Incorporated (NYSE:TDG) and Change Healthcare Inc. (NASDAQ:CHNG).
Since its inception, Abrams Capital Management has annually returned 15% on average on its primary funds, three times the S&P 500 Index, including dividends.
The investment firm has $4 billion in managed securities with a top 10 holdings concentration of 80% as of Q1, 2022. We’ve listed the top 10 stock picks in David Abrams’ 2022 portfolio below.
David Abrams of Abrams Capital Management
Our Methodology
For our list of top 10 stock picks from Abrams’ 2022 portfolio, we’ve listed securities that Abrams Capital Management is holding as of Q1, 2022. We’ve also highlighted some key factors like Abrams Capital Management’s stake value in each of these stocks as well as the percentage these stocks make up in Abrams’ portfolio and the number of total hedge funds holding these stocks as of Q1.
10. Coupang, Inc. (NYSE:CPNG)
Abrams Capital Management’s Stake Value: $240.5 million
Percentage of Abrams Capital Management’s 13F Portfolio: 5.61%
Number of Hedge Fund Holders: 39
Number 10 on the top 10 stock picks of David Abrams is Coupang, Inc. (NYSE:CPNG). It is a South Korean e-commerce company incorporated in Delaware. It is the largest e-commerce company in South Korea and is often called the Amazon of South Korea due to its market size.
Abrams Capital Management has over 13 million shares in Coupang, Inc. as of the first quarter of 2022 but Maverick Capital leads the hedge funds invested in the company with more than 86 million shares. All in all, the total equity owned by 39 hedge funds is worth almost $4 billion as of Q1.
Coupang, Inc. was upgraded to Buy from Neutral with a price target of $15, down from $29 by Citi analyst John Yu who sees higher visibility in the company’s short-term profit generation after its Q1 results.
Coupang, Inc. beat consensus EPS in its Q1 results by $0.05 but missed revenue estimates by $133 million with $5.12 billion in revenue.
Abrams Capital Management’s stake in Coupang, Inc. is moderately smaller than its holdings in Alphabet Inc., TransDigm Group Incorporated and Change Healthcare Inc..
9. Energy Transfer LP (NYSE:ET)
Abrams Capital Management’s Stake Value: $247.5 million
Percentage of Abrams Capital Management’s 13F Portfolio: 5.77%
Number of Hedge Fund Holders: 31
Energy Transfer LP (NYSE:ET) is a LNG and propane transporting company based in Texas. The company has various acquisitions under its umbrella, like Sunoco and SemGroup.
Analysts were massively off in the Q1, 2022 revenue estimates for Energy Transfer LP which beat consensus by a whopping $1.7 billion, with a revenue of $20.5 billion. Its EPS of $0.47 was also way above consensus of $0.31.
On April 26, Morgan Stanley analyst Robert Kad raised his price target on Energy Transfer LP to $15, up from $12 and kept an Overweight rating on the shares. The analyst is bullish on the outlook for the midstream industry over the balance of 2022.
Energy Transfer LP is a dividend paying stock. It’s also one of the highest dividend paying stocks in the market and pays higher than 75% of all others. Its annual dividend yield as of June 21 is 7.71%. Its shareholders of record on May 9 were paid a quarterly dividend of $0.20 per share on May 19.
Most in the top 10 stocks in Abrams Capital Management’s portfolio like Energy Transfer LP, Alphabet Inc., TransDigm Group Incorporated and Change Healthcare Inc. belong to absolutely different sectors but are somewhat comparable in terms of fundamentals.
Miller Value Partners discussed Energy Transfer LP in their Q2, 2021 investor letter. Here is what they said:
“Energy Transfer LP (ET) rose over the period along with the price of oil climbing 40.59% over the period. The company received positive news that the Dakota Access Pipeline project would not be shut down while the Environmental Impact Statement by the US Army Corps of Engineers is drawn up. Energy Transfer reported strong 1Q results with revenue of $17B surpassing expectations for $11.8B with adjusted earnings before income, taxes, depreciation and amortization (EBITDA) hitting $5.04B ahead of consensus of $2.77B. The company raised full year adjusted EBITDA guidance to $12.9-13.3B from $10.6-11.0B previously, with the increase largely related to the benefits realized from Winter Storm Uri. The company paid down $3.7B in debt during the quarter, using strong cash flow to reduce leverage. The company also announced the issuance of $900M in 6.5% Series H perpetual preferreds with the company using the proceeds to repay debt and for general purposes.”
8. AMERCO (NASDAQ:UHAL)
Abrams Capital Management’s Stake Value: $252.456 million
Percentage of Abrams Capital Management’s 13F Portfolio: 5.89%
Number of Hedge Fund Holders: 29
AMERCO (NASDAQ:UHAL) is involved in insurance as well as moving and storage operations businesses. The company’s management describes AMERCO as the largest DIY moving storage operator in the US and Canada. AMERCO is also one of the longest held stocks in Abrams’ portfolio with the holding going as far back as 5 years.
The company has seen some impressive growth. The operating cash flow for AMERCO has risen in the years 2017-2021, climbing from $1.06 billion to $1.54 billion. EBITDA followed and expanded from $1.22 billion in 2017 to $1.60 billion in the year 2021.
As with profitability, these cash flow figures have risen during the current fiscal year. In the first three quarters of the AMERCO’s 2022 fiscal year, operating cash flow is at $1.79 billion which represents an increase of 30% over the $1.38 billion that the company reported one year earlier. In the meantime, EBITDA grew from $1.31 billion to $1.87 billion. The figures show the stock is trading at an incredible discount if the financial performance is annualized based on the three quarters so far.
Third Avenue Management closed its position on Preferred Apartment Communities, Inc. (NYSE:APTS) and relocated the capital to AMERCO. This is what they had to say in their Q1, 2022 investor letter titled “Real Estate Value Fund.”
“Held in the Fund since 2018, AMERCO is widely recognized as the leader in self-moving in North America through its U-Haul subsidiary where it has an unrivaled network with approximately 176,000 trucks, 126,000 trailers, and 46,000 towing devices available across more than 23,000 locations. What is not as widely recognized, in Fund Management’s opinion, is that the company’s forward thinking management team has also spent the last decade assembling one of the largest self-storage portfolios in North America-not only solidifying the “moat” around its core business but also creating substantial value in the process.
Due to these efforts, AMERCO owned and managed more than 73 million square feet of self-storage facilities at the end of the 2021, placing it as the third largest owner of such properties in the US. Notwithstanding, the company does not seem to get much (if any) recognition for this transformation. To wit, if one were to apply the implied price per square foot for AMERCO’s closest comparable on the self-storage side of the business (e.g., Life Storage), they would arrive at an implied value for its impossible-to-replicate self-moving business of basically $0- despite it generating more than $1.0 billion of operating profits per year more recently, implying $7-8 billion of value based upon comparables within the rental segment.
This disconnect does not seem to be lost on Chairman and CEO Edward Shoen (who owns 42.7% of the company’s stock along with beneficiaries). In fact, in response to a question about the price-to-value discrepancy during the company’s most recent quarterly conference call, he remarked that “it’s a question that is regularly discussed at the board level” and that “hopefully we’ll have some news for you before the year is out.” In the meantime, AMERCO is not only continuing to self-finance the expansion of its self-storage portfolio with more than 7 million square feet of projects in development, but the company is also expanding its “U-Box” offering as it gains further market share in the portable storage and moving segment.”
7. Willis Towers Watson Public Limited Company (NASDAQ:WTW)
Abrams Capital Management’s Stake Value: $252.459 million
Percentage of Abrams Capital Management’s 13F Portfolio: 5.89%
Number of Hedge Fund Holders: 49
Willis Towers Watson Public Limited Company (NASDAQ:WTW) is a British-American analytics advisor covering risk, financial optimization and merger and acquisitions among other domains. It is a multinational company operating in over 140 countries.
Abrams Capital Management holds over 1 million shares of Willis Towers Watson Public Limited Company as of Q1, 2022. However, First Eagle Investment Management leads with a holding of 4.8 million shares.
Willis Towers Watson Public Limited Company beat earnings estimates in Q1 by a margin of $0.16, with an EPS of $2.66. On May 19, Willis Towers Watson Public Limited Company was removed by Raymond James analyst C. Gregory Peters from his current favorites list. However, Peters has a Strong Buy rating on the shares with a price target of $270.
Artisan Partners mentioned Willis Towers Watson Public Limited Company in their Q4, 2021 investor letter. Here’s what they said:
“During the quarter, we made meaningful new investments in two UK domiciled companies, (one of which is) Willis Towers Watson (WTW). Long-term investors will recognize Willis Towers Watson since it was in the portfolio from 2018 to early 2021. We exited that investment after WTW agreed to merge with Aon. Unfortunately for WTW and Aon, that proposed merger was rejected by the US Department of Justice in July 2021. In fact, there is significant market power in this industry, which is what makes it a great business. That market power is exerted not with the insurance brokers’ corporate customers, but with their suppliers (insurance underwriters). We were surprised at Aon’s attempted merger, and our concerns regarding antitrust approval encouraged us to sell.
WTW operates two businesses: insurance brokerage and HR consulting. Both are market-leading with attractive financial profiles and mostly recurring revenue streams. Despite these strengths, WTW operates with lower margins versus peers. The margin opportunity is most pronounced in the insurance brokerage business. Management has slowly increased the insurance brokerage margin over time, but a large gap remains with best-in-class peers like Marsh & McLennan and AJ Gallagher. Management presented a plan to increase the insurance brokerage business’s margins by 5% by year-end 2024. This plan follows the outline other insurance brokers have previously used to increase their margins—giving us confidence the targets are achievable.
The merger’s demise brought a new and experienced CEO, a new CFO and a refreshed shareholder-aligned board of directors. In addition, the merger’s cancellation transformed the company’s financial position. As part of the agreement, Aon paid WTW a $1 billion “break fee.” WTW also sold a re-insurance brokerage business for $3.25 billion along with the potential to earn $750 million through an earnout agreement. With the proceeds, WTW expects to repurchase approximately $4 billion of stock between the second half of 2021 and the end of 2022. With existing cash on hand and cash generation over the next three years, we estimate the company can return another $6 billion to shareholders through dividends and share repurchases representing over 20% of today’s market capitalization. We forecast earnings of approximately $20 per share in 2024—a price to earnings (P/E) ratio of 11.5X. We believe that valuation significantly undervalues this high-quality business.”
6. Meta Platforms, Inc. (NASDAQ:META)
Abrams Capital Management’s Stake Value: $267.9 million
Percentage of Abrams Capital Management’s 13F Portfolio: 6.25%
Number of Hedge Fund Holders: 200
Meta Platforms, Inc. (NASDAQ:META), formerly called Facebook, is a social media conglomerate operating Facebook, Instagram and WhatsApp. In 2021, the company announced its plans to transition to Metaverse, a virtual-reality-connected social media. Following that, Facebook changed its name to Meta.
On June 16, Cowen analyst John Blackledge talked about his survey data on Instagram reels and said that 21% of Meta Platforms, Inc.’s Instagram users regularly viewed reels in May 2022, the highest number since he started tracking its usage.
He said while rising reels viewership is positive, it is a short-term drag on monetization as Meta ramps its advertising offering. Blackledge reiterated his Outperform rating on Meta Platforms, Inc. shares with a price target of $300.
Unlike Alphabet Inc., TransDigm Group Incorporated and Change Healthcare Inc., Meta has taken a significant beating and is down by over 50% in the past six months and analysts are divided over buying the dip or letting it slide.
Here’s what Polen Capital had to say about Meta in their Q1, 2022 investor letter:
“What Would You Pay for the World’s Largest Communication and Entertainment Platform? How Does 5x Earnings Sound?
Meta Platforms also had solid, if not slightly lower-than-expected revenue growth last quarter but guided to a significant slowdown in revenue growth for 1Q 2022. Meta called out TikTok, a competitor for people’s time and attention, seeming to imply it as one of the factors causing the growth slowdown. This appeared to stoke fears that the company’s user engagement and value proposition was eroding for its users and marketers and subsequently would lead to lower advertising revenue growth and market share loss.
We do not doubt that TikTok is taking time and attention away from many forms of digital media, core Facebook and Instagram included. That said, we believe TikTok has mostly expanded the pie. Meta’s user engagement has been stable, even on the very mature core Facebook app. Our research shows that most of the growth headwinds are more likely attributable to a combination of factors. These factors include a preference for short-form video while spending time on the platform (Facebook and Instagram Reels), which is not monetized effectively yet, a COVID-19 pull-forward impact like Netflix, and changes to Apple’s (AAPL) iOS operating system.
More specifically, the changes to iOS make it more difficult for Facebook and Instagram to measure certain types of ads accurately, at least for now. Meta has quantified that the Apple impact as roughly a $10 billion revenue headwind for fiscal 2022, or approximately 7% of total revenue. This is a bit larger than we would have expected, and it is taking longer than expected for Facebook to develop with their own measurement tools. But, excluding the Apple impact alone, Facebook would be growing close to what we would have expected in a more normal environment. Although it could take some time to alleviate, we believe the Apple impact will prove temporary, and we continue to monitor engagement trends on Facebook and Instagram from competitors like TikTok…” (Click here to see the full text)
5. Asbury Automotive Group, Inc. (NYSE:ABG)
Abrams Capital Management’s Stake Value: $339 million
Percentage of Abrams Capital Management’s 13F Portfolio: 7.92%
Number of Hedge Fund Holders: 29
Asbury Automotive Group, Inc. (NYSE:ABG) is a Fortune-500 auto dealership company headquartered in Georgia, US. Abrams Capital Management’s shares in the company make up 37% of total equity owned by 29 hedge funds.
On May 20, JPMorgan analyst Rajat Gupta lowered his price target on Asbury Automotive Group, Inc. to $200 from $225 and kept a Neutral rating on the shares.
Asbury Automotive Group has a trailing Price to Earnings ratio of just 5, typical in the dealership industry which has had low valuation for many years. It is trading at a far cheaper rate than the market, which is trading at multiple of 24 on average.
Here is what LRT Capital Management had to say about Asbury Automotive Group in their Q1, 2022 investor letter:
“Asbury Automotive Group is one of the largest automotive retailers in the United States. It operates 90 dealerships consisting of 112 franchises and 25 collision repair centers. The company’s stores offer new and used vehicles, parts, and service, as well as finance and insurance (F&I) products. Franchise agreements controlled by automotive manufactures and state laws create an environment of tightly controlled market entry and restricted competition.
The dealership industry is highly fragmented with 93.5% of dealers having only between 1-5 locations according to data from 2020. In fact, dealers with over 50 locations account for only 0.1% of the industry – a testament to the huge opportunity for consolidation that lies ahead. Industry dynamics, including the rising complexity of automobiles and the need for omnichannel distribution are favoring better capitalized and larger dealer groups. We believe Asbury Automotive Group has several distinct advantages, particularly its highly profitable parts and service business, its overexposure to the luxury vehicle business, which carriers the best margins, and its Clicklane omnichannel strategy. Asbury’s management has also been acting in the best interests of its shareholders by allocating capital towards acquiring dealerships to aggressively expand its business, and occasionally repurchasing stock when attractive acquisitions targets could not be found.
ABG is not a fast-growing SaaS business, but when paying a valuation of ¼ of the overall stock market, one does not need to make heroic assumptions about the future to enjoy strong returns as shareholders. We believe that over the next several years, Asbury will continue to acquire dealerships, occasionally buyback stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.”
4. TransDigm Group Incorporated (NYSE:TDG)
Abrams Capital Management’s Stake Value: $351 million
Percentage of Abrams Capital Management’s 13F Portfolio: 8.2%
Number of Hedge Fund Holders: 64
TransDigm Group Incorporated is an aerospace manufacturer based in Cleveland.
On May 11, Wells Fargo analyst Matthew Akers lowered his price target on TransDigm Group to $620 from $700 and kept an Overweight rating on the shares post the Q1 results.
Akers remains optimistic on TransDigm Group’s stock as the recent commentary from the Wells Fargo Industrials Conference supports enduring aftermarket strength while the company has begun to step up the stock buyback, supporting the share price from this point on.
Abrams Capital Management holds a little over 539,000 shares in the company but the lead stakeholder happens to be Stockbridge Partners that has invested $1 billion in TransDigm Group as of the first quarter of 2022.
Vulcan Value Partners brought up TransDigm Group in their Q2, 2021 investor letter. Here’s what they had to say:
“TransDigm Group Inc., another material contributor during the quarter, is an aerospace manufacturer providing highly engineered, niche components for use on commercial and military aircraft. The vast majority of the company’s profits come from aftermarket sales. Its business was impacted by the global pandemic; however, the company has been able to maintain margins despite strong revenue headwinds, and it continues to generate strong free cash flow.”
3. Change Healthcare Inc. (NASDAQ:CHNG)
Abrams Capital Management’s Stake Value: $370 million
Percentage of Abrams Capital Management’s 13F Portfolio: 8.63%
Number of Hedge Fund Holders: 50
Change Healthcare Inc. provides payments and revenue cycle services, clinical and imaging services as well as patient and member engagement solutions.
On June 1, Citi analyst Daniel Grosslight raised his price target on Change Healthcare to $27.75, up from $25.75 and kept a Buy rating on the stock. The analyst said that the company’s fourth quarter results were better than expected and views the fiscal year 2023’s headwinds as temporary. Grosslight is appreciative of Change Healthcare’s risk/reward dynamic heading into this summer’s trial which is expected to determine UnitedHealth transaction’s fate.
Abrams Capital Management leads the 50 hedge funds invested in the company. The fund holds almost 17 million shares in the company as of the first quarter of 2022.
2. Alphabet Inc. (NASDAQ:GOOGL)
Abrams Capital Management’s Stake Value: $407 million
Percentage of Abrams Capital Management’s 13F Portfolio: 9.5%
Number of Hedge Fund Holders: 160
Alphabet Inc. is the third largest technology company and the fourth largest corporation in the world with a market cap of $1.7 trillion as of the first quarter of 2022.
On June 2, Piper Sandler analyst Thomas Champion lowered his price target on Alphabet to $2,775, down from $2,900 and kept an Overweight rating on the stock. Champion told investors in a research note that after two years of stretch, digital advertising spend is on its way to recovery, implying a boost in Alphabet’s revenue with its 29% market share in digital advertising.
Alphabet Inc. (GOOGL) confirmed a 20 to 1 stock split in its February earnings release. Investors that own shares on the record date of July 1 will each receive 19 additional Google shares for each one they hold on July 15.
Farrer Wealth Advisors mentioned Alphabet Inc. in their Q1, 2022 investor letter. Here’s what they said:
“We won’t waste much time trying to explain to our clients why Alphabet is such a phenomenal business, we believe that is quite self-evident. The better explanation is why we never bought Alphabet before. The reason was a personal bias we held based on three beliefs (which we now believe to be incorrect)
Growth in YouTube would stall as the increased ad-load would turn-off viewers (the double ad-load at the beginning of videos for example). Consumers will focus on discovery rather than search to purchase new items. For example – using Instagram/TikTok to decide what new clothes to buy instead of ‘googling’ for clothes. Other Bets: In general, we felt that capital spent on “Other Bets” has been a bit wasteful with the segment earning just around $3.1bn in revenue versus nearly $21bn in operating losses over the last five years…” (Click here to see the full text)
1. Lithia Motors, Inc. (NYSE:LAD)
Abrams Capital Management’s Stake Value: $705.6 million
Percentage of Abrams Capital Management’s 13F Portfolio: 16.46%
Number of Hedge Fund Holders: 46
Lithia Motors, Inc. (NYSE:LAD) is another automotive dealership company to make it to the list of David Abrams’ top 10 stock picks and it happens to be the number one. Not only is it number one in Abrams Capital Management’s top 10 stock picks, the fund is also the lead stakeholder with equity ownership worth $705.6 million.
On April 21, Wells Fargo analyst Colin Langan lowered his price target on Lithia to $350, down from $362 following Q1 results. Langan kept an Overweight rating on the shares.
Lithia Motors is a dividend paying stock. Shareholders of record on May 13 were paid a quarterly dividend of $0.42 per share on May 27. Lithia has been increasing the amount it pays out in dividends for 13 consecutive years, with a dividend payout ratio of 4%, indicating that its strong commitment to sustain as well as grow dividends.
Here is what Oakmark Funds had to say about Lithia Motors in their Q1, 2022 investor letter:
“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”
“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”
You can also take a peek at 5 High-Yield Dividend Stocks to Buy According to John A. Levin’s Levin Capital and 3 Defensive Stocks to Buy in 2022 According to Seth Klarman
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This article is originally published at Insider Monkey.
