The value investing guru David Abrams is one of the most successful hedge fund managers over the last two decades, thanks to his strategy of buying undervalued stocks and holding them over the years to maximize gains. After working ten years for Seth Klarman's investment firm Baupost Group, he founded Abrams Capital Management in 1999 and he managed to outperform the broader market index with a 15% average return in the first fifteen years since inception.
The self-made billionaire, who also made billions for his investors, manages $10 billion of assets at present while the value of the 13F portfolio stands above $3 billion.
The hedge-fund manager, David Abrams is one of the most admired value investors and he runs a concentrated stock portfolio. The billionaire likes to diversify investments towards foreign equity securities, private and illiquid investments, and debt.
He is a follower of Benjamin Graham's value investing approach. “I’ve observed a great many investors over the years, and I’ve never seen a consistently successful one whose strategy was not based on a value approach—paying less for something than it is worth, either today or in the future,” David Abrams said.
David Abrams of Abrams Capital Management
David Abrams of Abrams Capital Management
The billionaire hedge fund manager's investment strategy also includes buying depressed companies with strong long-term fundamentals. This is clearly reflection in its strategy of buying half a million shares of TransDigm Group Incorporated early this year when aircraft components supplier was under pressure. The billionaire also added to his Facebook stake early this year in the wake of staying at home policies and increased his position in internet advertisement company Alphabet.
He also took a big stake in Energy Transfer Partners early this year and added to his existing position in the September quarter as shares of the energy storage and transportation partnership remained under pressure throughout this year due to pandemic related challenges.
At the same time, the Boston-based hedge fund has also slashed its stake in drilling companies amid bleak future fundamentals.
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 88 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.
As Seth Klarman's protege continually re-evaluates investments based on the market conditions, let’s start examining billionaire David Abrams' top 10 stock picks to see how he is seeking to outperform the markets.
The asset management holding company Franklin Resources, Inc. (NYSE: BEN) is one of the long-running investments of billionaire David Abrams' 13F securities portfolio. Although the Boston-based hedge fund has reduced its position by 15% in the September quarter, Franklin Resources is still the tenth largest stock holding of its portfolio.
Shares of Franklin Resources has been underperforming over the past five years amid sluggish financial numbers. Despite share price underperformance, the company has extended its dividend growth strategy. It has raised its dividend every year since 1981.
David Abrams has also been showing confidence in AMERCO (NASDAQ: UHAL) over the years. Abrams Capital Management has significantly raised its position in truck renting service several times since first initiating a position in 2016. It is the ninth-largest stock holding of Abrams hedge fund, accounting for 6.35% of the overall portfolio.
Shares of AMERCO rallied sharply during the second half of 2020 after making a range-bound movement in the past four years. The latest share price gains are backed by robust year over year revenue growth of 14.8% in the latest quarter. Moreover, AMERCO’s earnings per share came in at $13.58 in the September quarter, up almost 90% from the year-ago period. Instead of investing all the profits back into the business, the company returns cash to investors in the form of big special cash dividends.
Automotive retailer Asbury Automotive Group, Inc. (NYSE: ABG) is one of the favorite stocks of David Abrams’ hedge fund. The firm has been holding a stake in Asbury Automotive since 2017 and it currently accounts for 6.56% of the overall 13F portfolio. Boston based hedge fund is holding 2.1 million shares of Asbury Automotive valued at $206 million.
It appears that David Abrams has benefited from its Asbury position because shares of the Automotive retailer rallied 22% in the last twelve months, extending the five years gains to 100%.
Other hedge funds are also showing interest in Asbury Automotive Group. It was in 24 hedge funds’ portfolios at the end of June, down slightly from an all-time high of 33.
Meanwhile, Diamond Hill Capital is bearish about the future fundamentals of Asbury Automotive. Here is what Diamond Hill Capital stated about Asbury Automotive Group in an investors letter:
“Car dealer Asbury Automotive Group, Inc. recently agreed to purchase a dealership in Dallas, Texas, to improve its poor new vehicle mix and geographic exposure; however, the deal fell through because the business needs cash to survive the impact of the coronavirus. We believe the core Asbury business is weak (although well run) and that the slowdown in sales from the coronavirus will have a long-term impact on the business.”
Abrams Capital Management looks bullish over the largest advertising services platform Alphabet Inc (NASDAQ: GOOGL). The firm has been holding a position in Alphabet since 2018 and it currently represents the seventh-largest stock holding in its 13F portfolio.
Shares of Google rallied almost 29% in 2020, accelerating five years gains to 120%. Besides David Abrams, the largest advertising platform is one of the favorite stock picks of other hedge funds. The Alphabet was in 150 hedge funds’ portfolios at the end of September compared to the previous all-time high of 148.
Baron Opportunity Fund, which returned 17.9% in Q3 2020, is among the bulls who expect Alphabet to outperform the broader market index in the quarter ahead. Here is what Baron Opportunity Fund stated in an investors letter:
“Considering solid Fund inflows, we added to long-term holding Alphabet Inc. to maintain its weighting in the portfolio. Alphabet is the parent company of Google, the world’s largest search and online advertising company. We increased our position in Alphabet this quarter as a protracted COVID-19-related recovery in travel and brand advertising presented an attractive buying opportunity. We are encouraged by improving trends in both search and YouTube, driven by durable tailwinds to e-commerce and local advertising, as well as the continued shift of video advertising dollars away from linear television as consumers increasingly cut the cable TV cord. We believe Google is becoming slightly more disciplined in capital allocation than it has been historically. Lastly, Google Cloud, which this quarter achieved a $12 billion revenue run rate under the leadership of Thomas Kurian, is having increasing success competing with larger vendors, due to its strengths in security, open-source, and data analytics.”
The pharmaceutical company Teva Pharmaceutical Industries Limited (NYSE: TEVA) is the fifth-largest stock holding of Abrams Capital, accounting for 6.89% of the 13F portfolio. The firm first initiated a position in Teva Pharmaceutical Industries during the third quarter of 2017.
Shares of Teva Pharmaceutical underperformed over the past couple of years amid declining revenue and widening losses.
Hedge funds are showing low interest in Teva. It was in 33 hedge funds’ portfolios at the end of the third quarter of 2020, down sharply from the all-time high of 81.
Miller Value Partners recently commented about the reasons behind Teva’s underperformance in an investor’s letter. Here is what Miller Value Partner 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.”
