In this article, we will discuss Top 10 Stocks to Buy According to David Abrams’s Abrams Capital Management.
Hailed as a “one-man wealth machine” by the Wall Street Journal, David Abrams is the CEO & founder of Abrams Capital Management. After studying History at the University of Pennsylvania, David Abrams entered the world of investing in 1988 by securing a job at Baupost Group LLC, which is one of the world’s largest hedge-fund firms. While at Baupost Group LLC, he struck a friendship with Seth Klarman, who became his mentor and educated him on various principles of investing. Seth Klarman was impressed by the intelligence of David Abrams and regarded him as “smart as a whip.” Seth Klarman’s investment approach is reflected in the investment style of David Abrams, who takes a fundamental, value-based, long-term approach to investing. His portfolio is often concentrated in specific sectors that he believes will outperform the market in the future. Moreover, he likes businesses in which the CEO has a substantial stake or where the executive’s compensation is predominantly stock-based.
Founded in 1999, Abrams Capital Management is an investment firm based out of Boston that invests in public and private companies. The firm applies unlevered and long-term oriented investment strategy following a fundamental stock-picking approach. Abrams Capital Management, as of its Q3 2022 filing, had a portfolio value of over $3.4 billion and a top 10 holdings concentration of 83.97%. The firm is highly concentrated in the Health Care, Consumer Discretionary, and Services sectors. Alphabet Inc. (NASDAQ:GOOG), TransDigm Group Incorporated (NYSE:TDG), and Change Healthcare Inc. (NASDAQ:CHNG) were some of the top holdings of Abrams Capital Management at the end of Q3 2022.
Our Methodology
We picked the top 10 stocks from Abrams Capital Management’s portfolio as of its Q3 2022 filing.
10. Teva Pharmaceutical Industries Ltd (NYSE:TEVA)
Abrams Capital Management Stake: $192,867,000
Percentage of Abrams Capital Management’s Portfolio: 5.56%
Number of Hedge Fund Holders: 35
Teva Pharmaceutical Industries Ltd (NYSE:TEVA) is a global company committed to helping patients worldwide by providing medicines at affordable prices and improving health through their constant innovations. Its operations are extended worldwide including United States and Europe. The medicines developed by Teva Pharmaceutical Industries Limited are over-the-counter drugs and specialty medicines for specific diseases. David Abrams reduced his stake in Teva Pharmaceutical Industries Ltd (NYSE:TEVA) by 1% during the third quarter. The fund held 23,899,296 shares of the company at the end of Q3 2022.
On October 21, 2022, Glen Santangelo, an analyst at Jefferies, initiated coverage of Teva Pharmaceutical Industries Ltd (NYSE:TEVA) with a Buy rating and a price target of $10. The analyst believes that the company is out of the courtroom trouble, which had previously weighed on the company’s stock price, but now after the settlement, the company is set to achieve a low-single-digit sales revenue growth going forward. At the end of Q3 2022, Abrams Capital Management held the highest stake in Teva Pharmaceutical Industries Ltd (NYSE:TEVA), with an investment value of over $192 million in the company.
In addition to Teva Pharmaceutical Industries Ltd (NYSE:TEVA), Abrams Capital Management had investments in Change Healthcare Inc. (NASDAQ:CHNG), Asbury Automotive Group, Inc. (NYSE:ABG), and Lithia Motors, Inc. (NYSE:LAD) at the end of Q3 2022.
9. Willis Towers Watson Public Limited Company (NASDAQ:WTW)
Abrams Capital Management Stake: $214,754,000
Percentage of Abrams Capital Management’s Portfolio: 6.19%
Number of Hedge Fund Holders: 50
Willis Towers Watson Public Limited Company (NASDAQ:WTW) has been a leading global advisory which helps its clientele all over the world to turn risk into the path leading to growth. The company employs over 44,000 people, and its clients are present in more than 140 countries. The clients are of large to medium scale, from multinational companies to domestic companies. David Abrams didn’t make any changes to his stake in Willis Towers Watson Public Limited Company (NASDAQ:WTW) during Q3 2022. The fund held 1,068,745 shares of the company at the end of the third quarter ending September 2022.
On September 26, 2022, Andrew Kligerman, an analyst at Credit Suisse, started coverage of Willis Towers Watson Public Limited Company (NASDAQ:WTW) with an Outperform rating on the company’s stock and a price target of $288. The analyst stated in a research note that the stock currently trades at a discount to its peers as the company’s EPS is expected to increase at a double-digit growth rate in the next two years.
Here is what Artisan Partners specifically said about Willis Towers Watson Public Limited Company (NASDAQ:WTW) in its Q3 2022 investor letter:
Willis Towers Watson Public Limited Company (NASDAQ:WTW) shares rose 2% in the quarter. This modest increase made it one of our best performers during a difficult quarter. Absent significant news, the business continues to benefit from a hard insurance market. Results are still lagging peers, but the management team seems to be making progress in closing the gap. In the meantime, the company is returning significant amounts of capital to shareholders. Over the past eight months, it has repurchased $4 billion in stock and reduced the share count by 15%. And there is more on the way. This is a good business in a fantastic industry trading at 12X normalized earnings . We believe it is worth much more.
First Eagle Investment Management remained the leading hedge fund with the biggest holding in the stock. The fund owned 4,868,960 shares of the company at the end of Q3 2022.
8. AMERCO (NASDAQ:UHAL)
Abrams Capital Management Stake: $215,358,000
Percentage of Abrams Capital Management’s Portfolio: 6.2%
Number of Hedge Fund Holders: 20
Founded in 1945, AMERCO (NASDAQ:UHAL) through its subsidiary U-Haul International, Inc. provides services and products to help people move and store household and commercial items at a lesser price. The company also provides life and health insurance, as well as loss adjustment and claims management services. Abrams Capital Management did not make any changes to its holding of AMERCO (NASDAQ:UHAL) stock during the third quarter. The stock comprised 6.2% of the fund’s portfolio at the end of the quarter.
On November 10, 2022, AMERCO (NASDAQ:UHAL) reported results for Q2 of the fiscal year 2023. The company reported revenue of $1.74 billion for the quarter, an increase of 2.4% YoY. The Normalized EPS for the quarter of $1.80 missed the market estimate by $0.27.
Third Avenue Management, an investment management firm, mentioned AMERCO (NASDAQ:UHAL) in their Q1 2022 investor letter. This is what they said:
Held in the Fund since 2018, AMERCO (NASDAQ:UHAL) 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 (NASDAQ:UHAL) 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 (NASDAQ:UHAL) 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 (NASDAQ:UHAL) 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. Coupang, Inc. (NYSE:CPNG)
Abrams Capital Management Stake: $223,295,000
Percentage of Abrams Capital Management’s Portfolio: 6.43%
Number of Hedge Fund Holders: 37
Coupang, Inc. (NYSE:CPNG) owns and manages an e-commerce business in South Korea, mainly through mobile applications and Internet websites. It works in two divisions: Product Commerce and Growth Initiatives. The company sells home goods and décor products, fashion, beauty products, fresh food and groceries, sporting goods, electronics, and everyday consumables. David Abrams decreased his investment in Coupang, Inc. (NYSE:CPNG) by 2% during the third quarter of 2022 and held 13,395,026 shares of the company as of the end of Q3 2022.
Coupang, Inc. (NYSE:CPNG) recently reported results for Q3 2022, posting a revenue of $5.1 billion, a growth of 9.9% YoY. The company posted a Normalized EPS of $0.05 for the quarter, beating the market estimate by $0.08.
Here is what Baron Funds specifically said about Coupang, Inc. (NYSE:CPNG) in its Q3 2022 investor letter:
Coupang, Inc. (NYSE:CPNG), the largest e-commerce platform in South Korea, contributed after reporting a sizable beat on second quarter earnings and raising annual EBITDA guidance. Upside was concentrated in e-commerce, where Coupang is now driving sequential margin expansion while maintaining a growth rate that is triple that of the industry average, lending credence to the investment case that Coupang will consolidate the fragmented e-commerce industry in Korea across both general merchandise and grocery, with healthy long-term margins to follow.
6. Energy Transfer LP (NYSE:ET)
Abrams Capital Management Stake: $242,873,000
Percentage of Abrams Capital Management’s Portfolio: 7%
Number of Hedge Fund Holders: 36
Energy Transfer LP (NYSE:ET) provides energy-related services operating pipelines for refined products, natural gas, natural gas liquids, and crude oil. It also conducts retail and wholesale motor gasoline operations and LNG terminals. Abrams Capital Management reduced its stake in Energy Transfer LP (NYSE:ET) during the third quarter by 7%. The fund has an investment value of over $242 million in the company’s stock.
On October 19, 2022, Robert Kad, an analyst at Morgan Stanley, increased his price target on Energy Transfer LP (NYSE:ET) to $17. The analyst currently has an Overweight rating on the stock. According to the analyst, the growth in share buybacks could be a catalyst for an upside in the share price.
Miller Value Partners, an investment firm, talked about Energy Transfer LP (NYSE:ET) in its Q2 2021 investor letter. Here is what the fund 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.
5. Alphabet Inc. (NASDAQ:GOOG)
Abrams Capital Management Stake: $278,399,000
Percentage of Abrams Capital Management’s Portfolio: 8.02%
Number of Hedge Fund Holders: 153
Founded in 1998, Alphabet Inc. (NASDAQ:GOOG) is a multinational technology holding company. Google is the most significant holding of the company, generating most of the company’s revenue. Google operates through two segments Google Services and Google Cloud. The Google Services division offers products and services. The Google Cloud division offers infrastructure and platforms. Alphabet Inc. (NASDAQ:GOOG) and other subsidiaries sell health technology and internet services. Abrams Capital Management doubled down on its investment in Alphabet Inc. (NASDAQ:GOOG), adding to the stake by 1888% during Q3 2022. The total investment of the fund in the company amounts to approximately $278 million.
On October 26, 2022, Mark Mahaney, an analyst at Evercore ISI, reduced his price target on Alphabet Inc. (NASDAQ:GOOG) to $130. The analyst currently has an Outperform rating on the company, and in a research note stated that his long-term view of the company remains positive despite a weak third quarter.
Here is what Mayar Capital has to say about Alphabet Inc. (NASDAQ:GOOG) in its Q3 2022 investor letter:
In early January this year – which admittedly feels like eons ago – US President Joe Biden was pushing Americans to take up the government’s offer of free COVID tests to help tackle the surging omicron variant. How did Biden respond when citizens asked about the availability of these tests?
“Google it!”
This advice, undoubtedly well-meant, was roundly scoffed at by the press, however. It seemed too obvious to be very helpful.
Anyway, the anecdote serves to introduce you to one of our largest holdings, Alphabet; the parent company of Google. Note that first, Alphabet’s original and core product – its search engine – has entered our common vocabulary as a verb. ‘Googling’ something has the same meaning as ‘researching’ or ‘finding an answer to’ something. Second the reason Biden’s advice was met with such opprobrium was because Googling something has become almost second nature to us now.
These two observations reveal a lot about Google’s strength in the search engine market, in which it has a share of over 90 percent. Because internet search is almost the prototypical network, Google has benefitted from – and we think is also protected by – the huge competitive advantage its scale brings – both to those asking the questions and those providing the answers. The Google search platform becomes increasingly useful to anyone seeking information as a greater volume of stuff becomes available. This starts a virtuous cycle that results in a colossal market share for Google itself. In the language of business strategists, Google benefits from vast network effects.
Because Google’s search results are viewed by billions of eyeballs every day, its search page ‘real estate’ is understandably very valuable to those with goods and services to sell. Advertising revenues from this ‘real estate’ as well as that from its other properties such as Mail, Maps, and so on, totaled almost USD 150b in 2021; amounting to almost 58% of the company’s revenues. Ad sales on YouTube, also owned by Alphabet, brought in another USD 28b. With the secular shift of the advertising spend to digital channels – over which Alphabet has a tight grip – we estimate the company has a share of around 40% of the digital advertising market and is probably the most valuable advertising property in the world… (Click here to see the full text)
4. TransDigm Group Incorporated (NYSE:TDG)
Abrams Capital Management Stake: $283,038,000
Percentage of Abrams Capital Management’s Portfolio: 8.16%
Number of Hedge Fund Holders: 66
TransDigm Group Incorporated (NYSE:TDG) was founded by W. Nicholas Howley and Douglas W. Peacock in 2003 and is headquartered in Cleveland. TransDigm Group Incorporated (NYSE:TDG) manufactures engineered aircraft components, systems, and subsystems. Abrams Capital Management did not change its position in the company’s stock during Q3 2022. The fund had an investment value of approximately $283.0 million in the company at the end of the third quarter.
On November 11, 2022, Scott Deuschle, an analyst at Credit Suisse, increased his price target on TransDigm Group Incorporated (NYSE:TDG) ‘s stock. The analyst now has a price target of $718 on the stock and stated that the company reported strong EBITDA and EPS in Q4 and raised FY23 adjusted EBITDA guidance by 1.5%, which is the reason why the analyst raised his price target.
Rowan Street Capital, an investment management company, mentioned DocuSign, Inc. (NASDAQ:DOCU) in its Q3 2022 investor letter. Here is what the fund said:
In the case of DocuSign, Inc. (NASDAQ:DOCU), the “Management” part no longer satisfies our requirements in order to remain in our investment portfolio. In the past 6-9 months, the company has had a huge turnover in both employees and upper management. In June of 2021, the board decided to get rid of Dan Springer, who had been a CEO of DocuSign since 2017 and took the company public in 2018. We found this decision strange as we thought that he actually did a great job growing the company over the past 5 years (revenues grew almost 5x from $519 million in 2017 to an estimated $2.4 billion this year).… (Click here to read the full text)
3. Asbury Automotive Group, Inc. (NYSE:ABG)
Abrams Capital Management Stake: $320,062,000
Percentage of Abrams Capital Management’s Portfolio: 9.22%
Number of Hedge Fund Holders: 27
Asbury Automotive Group, Inc. (NYSE:ABG) operates an automotive retailer in the United States. The company provides various automotive products and services, such as new and used vehicles, vehicle repair and maintenance, replacement parts, and accident repair services. As of December 31, 2021, Asbury Automotive Group, Inc. owned and operated 205 new vehicle franchises in the United States and 35 collision facilities. David Abrams kept his stake unchanged in Asbury Automotive Group, Inc. (NYSE:ABG) during Q3 2022. The holding in the company amounted to a value of $320 million at the end of the quarter.
On October 06, 2022, Rajat Gupta, an analyst at JPMorgan, reduced his price target on Asbury Automotive Group, Inc. (NYSE:ABG) to $185. The analyst currently has a Neutral rating on the stock and believes the macro slowdown is going to weigh on the company’s results in the near term.
Here is what LRT Capital Management has to say about Asbury Automotive Group, Inc. (NYSE:ABG) in its 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 carries 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 buy back stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.
2. Change Healthcare Inc. (NASDAQ:CHNG)
Abrams Capital Management Stake: $437,317,000
Percentage of Abrams Capital Management’s Portfolio: 12.6%
Number of Hedge Fund Holders: 53
Change Healthcare Inc. (NASDAQ:CHNG) is a leading independent healthcare technology platform that offers data and analytics-driven solutions to improve clinical, financial, administrative, and patient engagement results in the United States healthcare system. Change Healthcare Inc. (NASDAQ:CHNG) products are intended to improve clinical decision-making, streamline billing, collection, and payment processes, and provide a positive patient experience. Abrams Capital Management decreased its stake in Change Healthcare Inc. (NASDAQ:CHNG) by 7% during Q3 2022 and held 15,908,220 shares of the company as per the last filing of the fund.
On September 22, 2022, Investment bank Raymond James increased their price target on Change Healthcare Inc. (NASDAQ:CHNG) ‘s stock. The firm now has a price target of $635 on the company and currently has a Strong Buy rating on the stock. The recent settlement of the UnitedHealth/Change Healthcare (CHNG) trial is a positive event for the company, which will drive more upside, according to Raymond James.
Here is what Ave Maria specifically said about Change Healthcare Inc. (NASDAQ:CHNG) in its second quarter 2022 investor letter.
Change Healthcare Inc. (NASDAQ:CHNG) received an acquisition offer from UnitedHealth (UNH) at a price more than double our average purchase price in January of 2021. The acquisition subsequently failed to receive government approval, but to incentivize Change Healthcare shareholders to fight the issue in court, UnitedHealth promised to pay a dividend to Change Healthcare shareholders in the event of a deal break. The stock price rose accordingly, and we took the opportunity to exit Change Healthcare at an attractive price.
1. Lithia Motors, Inc. (NYSE:LAD)
Abrams Capital Management Stake: $504,422,000
Percentage of Abrams Capital Management’s Portfolio: 14.54%
Number of Hedge Fund Holders: 40
Lithia Motors, Inc. (NYSE:LAD) is a car dealership group operating in the United States. The business is divided into three segments: domestic, import, and luxury. Lithia Motors, Inc. (NYSE:LAD) provides new and used vehicles, vehicle financing, warranties, insurance contracts, vehicle and theft protection services, and automobile repair and maintenance also sell vehicle body and parts. The company has over 21,000 employees. David Abrams’s holding of Lithia Motors, Inc. (NYSE:LAD) remained unchanged during the third quarter of 2022, and the fund had an investment value of approximately $504 million in the company at the end of Q3 2022.
On October 21, 2022, Michael Ward, an analyst at Benchmark, reduced his price target on Lithia Motors, Inc. (NYSE:LAD) to $300 while keeping a Buy rating on the company’s stock. The company’s recent result was underwhelming as it missed the earnings estimates, which is why the analyst reduced his price target.
Here is what Oakmark Select Fund has to say about Lithia Motors, Inc. (NYSE:LAD) in its Q1 2022 investor letter:
As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) 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.
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