Abrams Capital Management Loves These 5 Stocks

Abrams Capital Management, led by David Abrams, revealed only 14 long positions in its latest 13F filing with the U.S. Securities and Exchange Commission, for the reporting period of September 30. The value of the fund’s equity portfolio stood at $1.40 billion at the end of September, down from $1.47 billion a quarter earlier. During the third quarter, the Boston-based hedge fund, which was founded by Abrams in 1999, initiated four new positions, while it unloaded two of its former holdings. In this article, we will be analyzing Abrams Capital’s top stocks heading into the fourth quarter.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 Barnes & Noble Inc. (NYSE:BKS)

– Shares held (as of September 30): 6.92 Million

– Total Value (as of September 30): $83.79 Million

– Percent of Portfolio (as of September 30): 6.00%

Abrams Capital added 1.80 million shares to its holding of Barnes & Noble Inc. (NYSE:BKS) during the third quarter. Barnes & Noble Inc. (NYSE:BKS) is a $940.3 million retailer of physical and digital books and media, and educational products. In August, Barnes & Noble completed the separation of its Retail and College businesses, with Barnes & Noble Education Inc (NYSE:BNED) becoming an independent public company and parent of Barnes & Noble College. Under the plan, stockholders who held Barnes & Noble’s common stock on July 27 received a distribution of 0.632 Barnes & Noble Education common shares for every Barnes & Noble share. Barnes & Noble Inc. (NYSE:BKS)’s stock has declined by 46.9% year-to-date. Jim Simons’ Renaissance Technologies holds 1.60 million shares of Barnes & Noble Inc. (NYSE:BKS) as of the end of September.

#4 Barnes & Noble Education Inc (NYSE:BNED)

– Shares held (as of September 30): 7.15 Million

– Total Value (as of September 30): $90.82 Million

– Percent of Portfolio (as of September 30): 6.50%

Due to the aforementioned spinoff, Abrams Capital held a new position in Barnes & Noble Education Inc (NYSE:BNED) at the end of the third quarter. The company provides bookstore operation services, operating 724 campus stores serving colleges and universities throughout the United States. After its spinoff from Barnes & Noble in August, Barnes & Noble Education Inc (NYSE:BNED) became an independent public company which is now focusing on future growth opportunities to enhance its services. The company is being led by Michael Huseby, who is a former CEO of Barnes & Noble. Shares of Barnes & Noble Education Inc (NYSE:BNED) have performed impressively over the last 30 days, increasing by 9.27%. In its latest 13F, Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, reported holding 170,540 shares of the company as of the end of September.

On the next page, we will talk about Abrams Capital’s top three stock picks, including Microsoft Corporation (NASDAQ:MSFT).

#3 Wells Fargo & Co (NYSE:WFC)

– Shares held (as of September 30): 2.77 Million

– Total Value (as of September 30): $142.2 Million

– Percent of Portfolio (as of September 30): 10.18%

Abrams Capital’s stake in Wells Fargo & Co (NYSE:WFC) remained unchanged over the course of the third quarter. The company’s stock is trading down by 0.47% year-to-date, and with a forward P/E of 12.3 and a 2.75% dividend yield, Wells Fargo looks like an attractive stock. At the end of the second quarter, a total of 91 hedge funds among those that we track were holding stakes in Wells Fargo & Co (NYSE:WFC). This represented a significant increase from 72 funds long Wells Fargo at the end of the first quarter. The total value of these investments also rose to $34.13 billion, compared to $32.81 billion at the end of March. Wells Fargo & Co (NYSE:WFC) reported third quarter income of $5.8 billion, or $1.05 per common share, compared to $5.7 billion, or $1.02 per share, a year earlier. Tom Russo’s Gardner Russo & Gardner, in its most recent 13F, revealed owning 14.58 million shares of Wells Fargo as of the end of September.

#2 Microsoft Corporation (NASDAQ:MSFT)

– Shares held (as of September 30): 4.98 Million

– Total Value (as of September 30): $220.42 Million

– Percent of Portfolio (as of September 30): 15.78%

Abrams Capital also did not make changes to its position in Microsoft Corporation (NASDAQ:MSFT) during the third quarter. Microsoft saw an overwhelming response for its latest operating system, Windows 10, which includes some great updates. Windows 10, being offered as a free download to people using Windows 7 or Windows 8, is expected to greatly benefit the company in the long-term. For the third quarter, Microsoft Corporation (NASDAQ:MSFT) posted EPS of $0.67 on revenues of $21.7 billion, beating estimates by $0.08 per share. For full-year 2016, the company has increased its earnings expectations to a range of $2.49-to-$2.54 per share. Another investor that sees value in Microsoft is Donald Yacktman’s Yacktman Asset Management, which holds 17.11 million shares of the company as of the end of September.

#1 The Western Union Company (NYSE:WU)

– Shares held (as of September 30): 21.61 Million

– Total Value (as of September 30): $396.74 Million

– Percent of Portfolio (as of September 30): 28.40%

The Western Union Company (NYSE:WU) is represented as Abrams Capital’s top holding. As with Wells Fargo and Microsoft, the investor did not alter its position in Western Union during the third quarter. Western Union is a dominating and growing player in the global payments market. To survive in the digital financial age, Western Union Company has been working on different plans and services. Recently, the company launched a new service, WU Connect, to allow money transfers through social and mobile networks. For the third quarter, The Western Union Company (NYSE:WU) reported revenues of $1.40 billion, down from $1.44 billion in the same quarter a year earlier. Shares of the company are trading up by 3.57% year-to-date. Ariel Investments, led by John W. Rogers, holds 10.54 million Western Union shares as of the end of the third quarter.

Disclosure: None