4 Best Value Stocks to Buy According to David Abrams

1. Lithia Motors, Inc. (NYSE:LAD)

Abrams Capital Management’s Stake Value: $538.2 million
P/E Ratio: 5.53

Lithia Motors, Inc. (NYSE:LAD) was the largest holding of Abrams Capital Management at the end of Q1 2023. The hedge fund owned over 2.3 million shares in the automotive dealership company, worth over $538.2 million. The company represented 17.02% of David Abrams’ portfolio.

As of the March quarter of 2023, 37 hedge funds in Insider Monkey’s database reported having stakes in Lithia Motors, Inc. (NYSE:LAD), compared with 40 in the previous quarter. The consolidated value of these stakes is roughly $1.7 billion.

Right Tail Capital mentioned Lithia Motors, Inc. (NYSE:LAD) in its Q1 2023 investor letter. Here is what the firm has to say:

“The original research premise fit right into Right Tail’s wheelhouse: a set of good businesses trading at attractive long-term valuations. Valuations look inexpensive at mid to high single digit multiples of earnings. Historically, these businesses have traded at 10-15x P/E multiples despite having more leverage and holding more inventory than they do today. In some ways, the historical multiples feel appropriate given their delicate relationships with manufacturers and cyclicality; on the other hand, these businesses have produced solid mid-teens returns with attractive reinvestment opportunities suggesting they are better than average companies. Adding another wrinkle to the puzzle, these businesses have over-earned the last few years due to Covid (car shortages, consumers flush with cash, etc.).

As I began the work, the compelling return potential warranted additional research. Lithia Motors (LAD), for example, has laid out a 2025 earnings per share target of $55-60. If the company reaches $55 in earnings and trades at a 12x P/E, we’d have a stock price of $660 – this would be a triple from today’s prices and produce a ~45% IRR over 3 years. The businesses are also producing lots of cash currently (LAD has earned ~$40 per share the last few years) creating additional capital allocation optionality.”

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