In this piece, we will take a look at the 10 best stocks to buy today according to value investor David Abrams. If you want to take a look only at the top five stocks in this list then head on over to 5 Best Stocks to Buy Today According to Value Investor David Abrams.
Mr. David Abrams is an American hedge fund investor in charge of the fund Abrams Capital Management. He is the fund’s chief executive officer and portfolio manager. Mr. Abrams has decades of experience working in the financial industry, and like some of his other peers, he was also employed in the hedge fund industry prior to creating his own firm in 1999.
Before starting his journey at Abrams Capital, the executive worked at the investment firm Baupost Group for ten years, after having joined the company in 1989. His investment firm practices what is dubbed as value investment in the financial world. This approach involves identifying an undervalued company, buying its shares, and holding on to them with the belief that the stock price will increase. The undervalued firms are often identified through financial models and mathematics, and their calculated stock price, which can incorporate future revenues and cash flows to a company, is then compared to the share price the stock is trading at in the market.
This strategy has served Abrams Capital well, with the fund having average returns of 15% from 1999 to 2014. It is also one of the few billion dollar funds in the industry, with a portfolio value of $4.5 billion as of the end of the third quarter of last year. When compared to its value at the end of Q3 2020, this marks an impressive 50% growth, indicating that investors are feeling more confident when compared to the year in which the ongoing pandemic disrupted global markets and economies.
Mr. Abrams’ hedge fund’s largest holdings are in Lithia Motors, Inc. (NYSE:LAD), Asbury Automotive Group, Inc. (NYSE:ABG), Meta Platforms, Inc. (NASDAQ:FB), and Alphabet Inc. (NASDAQ:GOOG). Cumulatively, the top holdings account for roughly 43% of the $4.5 billion portfolio. Unlike some other portfolios, Abrams Capital has invested in only a few companies, with stakes in 18 firms as of the end of the third quarter of last year.
David Abrams of Abrams Capital Management
Our Methodology
For picking out Mr. Abrams’ top stocks, we took a look at his firm’s 13-F filings for the third quarter of last year. This enabled us to identify the top stocks in his portfolio. In order to gain background for the selected companies, we looked at their quarterly earnings reports, analyst coverage, other large shareholders, investor letters, and hedge fund sentiment generated through Insider Monkey’s Q3 2021 survey of 867 funds.
10 Best Stocks to Buy Today According to Value Investor David Abrams
10. Energy Transfer LP (NYSE:ET)
Abrams Capital’s Stake Value: $211 million
Percentage of Abrams Capital’s 13F Portfolio: 4.62%
Number of Hedge Fund Holders: 29
Energy Transfer LP (NYSE:ET) is a natural gas storage and transportation provider headquartered in Dallas, Texas, United States. The company sells natural gas to industrial users, power providers, and local distribution companies.
Mr. Abrams’ hedge fund owned 22 million Energy Transfer LP (NYSE:ET) shares by the end of Q3 2021, in a stake that was worth $211 million and represented 4.62% of the hedge fund’s portfolio. An Insider Monkey survey of 867 funds for the same period revealed that 29 owned the gas company’s shares.
Energy Transfer LP (NYSE:ET)’s largest investor after Abrams Capital is David Tepper’s Appaloosa Management LP who owns 10 million shares worth $96 million.
For its third quarter, Energy Transfer LP (NYSE:ET) posted $16 billion in revenue and $0.20 for GAAP EPS, missing EPS estimates and beating those for revenue. Mizuho reduced the company’s price target to $36 from $39 in December 2021, outlining that business transformation by Energy Transfer LP (NYSE:ET) removes some earnings from its valuation model.
Miller Value Partners mentioned Energy Transfer LP (NYSE:ET) in its Q2 2021 investor letter stating that:
“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 Core 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 f low 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.”
Energy Transfer LP (NYSE:ET) joins Asbury Automotive Group, Inc. (NYSE:ABG), Meta Platforms, Inc. (NASDAQ:FB), and Alphabet Inc. (NASDAQ:GOOG) in Mr. Abrams’ list of favorite stocks.
9. Teva Pharmaceutical Industries Limited (NYSE:TEVA)
Abrams Capital’s Stake Value: $234 million
Percentage of Abrams Capital’s 13F Portfolio: 5.1%
Number of Hedge Fund Holders: 22
Teva Pharmaceutical Industries Limited (NYSE:TEVA) is a pharmaceutical firm that manufactures and sells generic medicines, specialty products, and biopharmaceutical medicines in the United States and globally. The company is headquartered in Tel Aviv, Israel.
By the end of Q3 2021, Abrams Capital owned 24 million Teva Pharmaceutical Industries Limited (NYSE:TEVA) shares. These were worth $234 million and represented 5.1% of its portfolio. Insider Monkey’s third quarter 2021 survey of 867 hedge funds revealed that 22 owned the company’s shares.
Teva Pharmaceutical Industries Limited (NYSE:TEVA) reported $3.9 billion in revenue and $0.59 in EPS for its Q3, missing analyst estimates for both. The company’s stock was downgraded to Market Perform from Outperform by Raymond James in October 2021, who highlighted that the drugmaker is not performing according to modeled estimates.
Teva Pharmaceutical Industries Limited (NYSE:TEVA)’s largest investor is Warren Buffett’s Berkshire Hathaway who owns 42 million shares worth $416 million.
Value investor Abrams’ portfolio includes several growth names as of the end of September, including Asbury Automotive Group, Inc. (NYSE:ABG), Meta Platforms, Inc. (NASDAQ:FB), and Alphabet Inc. (NASDAQ:GOOG).
8. Willis Towers Watson Public Limited Company (NASDAQ:WLTW)
Abrams Capital’s Stake Value: $254 million
Percentage of Abrams Capital’s 13F Portfolio: 5.54%
Number of Hedge Fund Holders: 75
Willis Towers Watson Public Limited Company (NASDAQ:WLTW) is a British company that provides its clients with brokerage services, advice about pension and retirement savings plans, consulting services to insurance companies, and employee benefit services among others.
For its fiscal Q3, Willis Towers Watson Public Limited Company (NASDAQ:WLTW) reported $1.73 in non-GAAP EPS and $2 billion in revenue, with a 4% annual revenue growth. Truist raised the company’s price target to $310 from $290 in October 2021 sharing that it was impressed by the earnings report and strong growth.
Abrams Capital owned 1 million Willis Towers Watson Public Limited Company (NASDAQ:WLTW) shares during the third quarter of last year, in a $254 million stake comprising 5.54% of its portfolio. During the same time period, 75 of the 867 hedge funds polled by Insider Monkey held stakes in the company.
Jean-Marie Eveillard’s First Eagle Investment Management is Willis Towers Watson Public Limited Company (NASDAQ:WLTW)’s largest investor through a $1 billion stake via 4.7 million shares.
In its Q3 2021 investor letter, Alluvial Capital Management mentioned Willis Towers Watson Public Limited Company (NASDAQ:WLTW). Here is what the fund said:
“The second position is much larger and was thrown into our hands by an unexpected turn of events. It is the stock of Willis Towers Watson. This is a British company with roots dating back to 1828. WLTW is the third-largest insurance broker in the world. This is a sector with which we are very familiar, as some time ago we held in our portfolio shares of its slightly larger competitor AON.
It was AON in fact that announced last spring it had agreed to merge with WLTW. In the merger, WLTW shareholders would have received AON shares. As is usually the case with such announcements, investors stepped in to conduct what is known as merger arbitrage. In this particular case, they bought WLTW shares and sold short AON shares in order to profit from the fact that the prices of the two stocks did not yet fully reflect the exchange ratio in the merger. Moreover, merger arbitrage commonly makes extensive use of leverage in order to increase profits.
This summer, however, AON and WLTW jointly announced that they were pulling out of the planned merger because they had not received approval from the US Department of Justice. The regulator had feared that in an already quite concentrated industry, a merger of the second- and third-largest players would restrict competition too much. The immediate reaction to this announcement was, of course, closing of positions from the merger arbitrage. This brought an immediate increase in the price of AON shares and decline in the price of WLTW shares. We saw this as an excellent buying opportunity in WLTW stock. (In addition, WLTW had received a USD 1 billion breakup fee from AON.) Because we knew the industry and the two companies well from earlier years, we were able to react immediately, and a new, very attractive investment appeared in Vltava Fund’s portfolio rather unexpectedly and quickly.
Insurance brokerage is a very good business. Simply put, insurance brokers are intermediaries who sell, find, or negotiate insurance on behalf of a client for a fee. They do not bear the insurance risk themselves and thereby do not risk their own capital. They live from commissions and the fact that this is a large and recurring business. Just to give you a sense of this, I will note, for example, that of the 500 companies in the Fortune Global 500 list, more than 90% are clients of WLTW. The entire industry is very concentrated and has relatively high barriers to entry. WLTW is the third-largest global player, has very high free cash flow, low capital investment requirements, and a very valuable client base. The business as a whole also provides some long-term inflation protection, as the speed at which the volume of total premiums grows follows the speed at which the economy and asset prices grow in nominal terms. I have to say we are very happy that circumstances have passed this investment on to us.”
7. TransDigm Group Incorporated (NYSE:TDG)
Abrams Capital’s Stake Value: $336 million
Percentage of Abrams Capital’s 13F Portfolio: 7.34%
Number of Hedge Fund Holders: 63
TransDigm Group Incorporated (NYSE:TDG) sells and designs aircraft components and subsystems for several categories such as airframe, cockpit, avionics, and others. It also provides products to other companies such as satellite firms.
TransDigm Group Incorporated (NYSE:TDG) brought $1.28 billion in revenue and $4.25 in non-GAAP EPS for its fourth quarter of fiscal 2021, missing revenue and beating EPS estimates. Susquehanna raised its price target to $708 from $680 in a November 2021 analyst note, worrying about demand recovery and supply chain problems plaguing the global economy.
Mr. Abrams’ hedge fund held 539,305 TransDigm Group Incorporated (NYSE:TDG) shares during the third quarter of last year in a stake that was worth $336 million and represented 7.34% of its portfolio. During the same time period, 63 of the 873 hedge funds polled by Insider Monkey owned the company’s shares.
TransDigm Group Incorporated (NYSE:TDG)’s largest shareholder is Chase Coleman and Feroz Dewan’s Tiger Global Management LLC, which owns 1.7 million shares for a stake of $1 billion.
Vulcan Value Partners, mentioned TransDigm Group Incorporated (NYSE:TDG) during its Q2 2021 investor letter which stated that:
“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.”
6. Change Healthcare Inc. (NASDAQ:CHNG)
Abrams Capital’s Stake Value: $355 million
Percentage of Abrams Capital’s 13F Portfolio: 7.75%
Number of Hedge Fund Holders: 50
Change Healthcare Inc. (NASDAQ:CHNG) is a data analytics services provider that targets the American healthcare industry. Its products allow customers to manage their revenue and workflow among other tasks.
Abrams Capital owned 16.9 million Change Healthcare Inc. (NASDAQ:CHNG) shares for a $355 million stake by the end of last year’s third quarter. A Q3 2021 Insider Monkey survey of 867 hedge funds revealed that 50 had stakes in the company.
For its fiscal Q2, Change Healthcare Inc. (NASDAQ:CHNG) reported $826 million in revenue and $0.35 in non-GAAP EPS missing analyst estimates for both. Piper Sandler kept the company’s price target at $25.75 in an August 2021 analyst note.
Change Healthcare Inc.’s (NASDAQ:CHNG) largest shareholder after David Abrams is Alec Litowitz and Ross Laser’s Magnetar Capital who holds 7 million shares worth $152 million.
Along with Asbury Automotive Group, Inc. (NYSE:ABG), Alphabet Inc. (NASDAQ:GOOG), and Meta Platforms, Inc. (NASDAQ:FB), Change Healthcare Inc. (NASDAQ:CHNG) is one of Mr. Abrams top stock picks.
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Disclosure: None. 10 Best Stocks to Buy Today According to Value Investor David Abrams is originally published on Insider Monkey.
