David Abrams' hedge fund, which managed to outperform the broader market index with a 15% average return in the first fifteen years since inception, saw strong share price gains from the majority of its top ten holdings during the pandemic year. The $10 billion hedge fund manager has made only a few but smart changes in its equity portfolio during 2020. Only two stocks including TransDigm Group (NYSE: TDG) Incorporated and Energy Transfer Limited (NYSE: ET) met the buying criteria set by David Abrams.
The self-made billionaire started 2021 with 17 stock positions. His hedge fund Abrams Capital Management has extended the strategy of holding large positions in few companies, with the top three positions represented 38% and the top ten holdings accounted for 87% of the overall portfolio based on the latest 13F filings. However, he has spread investments across several sectors including communications, consumer discretionary, healthcare, Utilities, industrials and transports. Abrams' strategies are working because seven out of his top 10 stock positions outperformed the broader market index so far in 2020.
David Abrams, who worked 10 years for Seth Klarman's investment firm Baupost Group, has significantly lowered his portfolio exposure towards the financial sector. The firm sold out its Franklin Resources (NYSE: BEN) position during the fourth quarter, reducing financial stocks weighting to 6.50% of the overall portfolio compared to 13.70% at the beginning of the year.
David Abrams
David Abrams of Abrams Capital Management
Before moving on to the 10 best cheap stocks to buy now according to billionaire Abrams, let’s take a brief look at his educational and professional background. After completing his BA in history, David Abrams made an unintended entrance into an investing career and then joined value investing legend Seth Klarman before starting his own firm Abrams Capital Management in 1999. Seth Klarman's protégé, who is also known as “one man wealth machine”, always suggest investors to adopt a long-term approach and be patient when it comes to investing in stock markets.
"Being patient is very good, but there has to be a limit," David Abrams said. His firm closely watches securities for five years before deciding to invest as he says the long term is made up of a lot of short terms. The investing legend says his firm buy opportunities in both struggling and shining companies. "We make a lot of money from mucking around in the garbage, and we also buy nice shiny things, and we care what we pay for both," he said.
While David Abrams' 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 (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 16. 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 reviewing 10 best cheap stocks to buy now according to billionaire Abrams because it’s always wise to follow legendary investors investing strategies for stock portfolio construction.
The Boston based hedge fund has been holding a position in Kinder Morgan Inc (NYSE: KMI) since the first quarter of 2018. Although KMI stock price outperformed the broader market index so far this year but the stock fell sharply in the last twelve months due to tumbling financial numbers and lower commodity prices. On the positive side, the hedge fund has bagged massive dividends from Kinder Morgan. The company currently offers a dividend yield of 6.69%.
Kinder Morgan is among the best cheap stocks to buy now according to billionaire Abrams. The company expects to generate net earnings in the range of $2.1 billion for 2021 compared to net earnings of $119 million in 2020. The forecast for the adjusted EBITDA is standing around $6.8 billion and DCF is likely to come around $4.4 billion.
9. Willis Towers Watson Public Limited Company (NASDAQ: WLTW)
The billionaire investor has been enjoying both dividends and share price gains from his position in Willis Towers Watson Public Limited Company (NASDAQ: WLTW) since 2016. It is ranked ninth among the 10 best cheap stocks to buy now according to billionaire Abrams. Shares of Willis Towers rallied almost 5% year to date, extending the five years gains to 90%. In addition to share price gains, the Boston based hedge fund has also been enjoying hefty dividends from Willis Towers. The company currently offers a dividend yield of 1.28% and it has raised dividends in the last two straight years.
WLTW is favored by several value funds counting Cantillon Capital and First Eagle Investment Management among its top 2 holders in Insider Monkey's database. WLTW was in the portfolios of 58 hedge funds at the end of December. This figure stood at 51 at the end of September. Water Island Capital and Berry Street Capital are among the new additions to the list of hedge funds with bullish WLTW positions.
David Abrams has also been holding a big stake in Teva Pharmaceutical Industries Limited (NYSE: TEVA) over the last three years. It is the eighth largest stock holding of Abrams Capital Management, accounted for 6.60% of the overall portfolio at the end of the fourth quarter. Shares of Teva outperformed the broader market index year to date despite a sluggish performance in the past couple of years.
In a Q3 investor’s letter, Miller Value Partners stated reasons for the pressure on Teva Pharmaceutical’s share price. Here is what Miller Value Partners said:
“Teva Pharmaceuticals (TEVA) declined 26.9% during the quarter as the market continues to be concerned on opioid liabilities as well as price fixing lawsuits. The company report 2Q results with total revenue of $3.87B below consensus of $4.024B, but reiterated 2020 company guidance of $16.6-17B (consensus of $17.041B). The company reported 2Q Adjusted EBITDA of $1.108B versus $1.099B expected and reiterated 2020 Adjusted EBITDA of $4.5-4.9B ($4.637B consensus) and adjusted EPS of $2.30-2.55 ($2.53 consensus) and Free Cash Flow of $1.8-2.2B. The company was hit after the US Department of Justice alleged in a lawsuit that TEVA provided illegal copays from 2006-2015 on a drug to treat MS. The allegation is $300mm of false claims which TEVA would be liable for 3x that in potential damages if they were to lose in court.”
UHAL ranks 7th on our list of the 10 best cheap stocks to buy now. The hedge fund's strategy of holding a stake in Amerco (NASDAQ: UHAL) generated robust gains in 2020 and extend that momentum into 2021. Shares of the moving and storage operator for household and commercial goods rose 72% in the last twelve months, thanks to strong revenue growth trends. The company has generated 26% year-over-year revenue growth in the latest quarter.
Third Avenue Management, a disciplined, value-oriented asset manager and investment fund, highlighted few stocks including Amerco in Q3 investor’s letter. Here is what Third Avenue Management said:
“During the period, the Fund reduced its exposure to the common stock of AMERCO. The proceeds from this reduction was primarily used to fund a new investment position.”
Google parent Alphabet Inc. (NASDAQ: GOOGL) is among the 10 best cheap stocks to buy now according to Abrams. The billionaire investor first initiated a position in Alphabet during the second quarter of 2018 and his firm benefitted from the position. This is because shares of Alphabet soared close to 48% in the last twelve months, extending the five years gains to 180%.
Bretton Fund, which returned of 11.52% for the quarter, commented on few stocks including Alphabet in a Q4 investor’s letter. Here is what hedge fund said:
“Google (aka Alphabet) was one of our best performing stocks last year, returning 30.9%, while its earnings per share increased 19%. As lockdowns first went into place in the spring, many advertisers hit pause on their campaigns, waiting—like a lot of us—to see what the world would look like. And then—like a lot of us—advertisers adjusted. Travel companies cut back their campaigns, while ads for other goods, like athleisure wear and video games, picked up the slack. Google had a rough second quarter, but was back in the swing of things by the next quarter.”
