Billionaire David Abrams Maintains Stakes in The Western Union Company (WU), Microsoft Corporation (MSFT)

Abrams Capital Management, the Boston-based hedge fund headed by reclusive billionaire David Abrams, recently submitted its 13F filing with the SEC for the reporting period ending June 30, revealing a long US equity portfolio worth $1.91 billion. As is the case with most value-focused hedge funds, Abrams Capital Management also makes very few changes in its portfolio on a quarterly basis and places concentrated bets on the stock it likes. Hence, its major holdings at the end of June were the same that it had reported at the end of the March.

During the second quarter, the fund initiated a stake in only one stock and sold its entire holdings in two stocks. Since the fund’s top five equity holdings alone amassed nearly two-third of the value of its equity portfolio at the end of June, in this post, we will focus solely on those stocks and will review their performances this year.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points in our backtests that covered the period between 1999 and 2012 (see the details here).

#5 Wells Fargo & Co (NYSE:WFC)

– Shares Owned by Abrams Capital Management (as of June 30): 2.77 Million

– Value of Holding (as of June 30): $131.10 Million

Let’s start with Abrams Capital Management’s fifth-largest holding, Wells Fargo & Co (NYSE:WFC). The largest bank holding company in the U.S. has lost more than 15% of its market capitalization this year and its stock is back to levels it was trading at in early-2014. A large part of the loss that the stock has registered this year came in earlier this month after the company was fined $185 million for an account opening scandal in which its employees opened millions of fraudulent deposit and credit card accounts in order to meet their sales targets and collect bonuses. On September 20, while Wells Fargo & Co (NYSE:WFC)’s CEO, John Stumpf, was being grilled by the Senate Banking Committee, analysts at Morgan Stanley upgraded the stock to ‘Overweight’ from ‘Equal Weight’ citing its current annual dividend yield of 3.5% and its current trading price, which they said is “rarely this inexpensive. This is an opportunity.” However, at the same time, they lowered their price target on the stock to $53 from $56. At the end of June, there were 88 hedge funds covered by us that were long Wells Fargo & Co with the aggregate value of their holdings in it amounting to $28.44 billion.

#4 Manitowoc Foodservice Inc (NYSE:MFS)

– Shares Owned by Abrams Capital Management (as of June 30): 11.25 Million

– Value of Holding (as of June 30): $198.32 Million

Manitowoc Foodservice Inc (NYSE:MFS) became a separately traded public company in March this year following the completion of its spin-off from Manitowoc Company, Inc. Since then, the stock of Manitowoc Foodservice Inc (NYSE:MFS) has appreciated by over 35%. Some analysts who cover the stock think that it has run up significantly in the last few months and can be range-bound or see a correction going forward. For its most recent quarter, Manitowoc Foodservice Inc (NYSE:MFS) reported EPS of $0.12 on revenue of $368.40 million versus analysts’ expectation of EPS of $0.16 on revenue of $379 million. During the second quarter, the ownership of the company among funds covered by us came down by three to 19, but the aggregate value of their holdings in it increased by $60.74 million to $785.27 million.

#3 Microsoft Corporation (NASDAQ:MSFT)

– Shares Owned by Abrams Capital Management (as of June 30): 4.98 Million

– Value of Holding (as of June 30): $254.83 Million

While Abrams Capital Management kept its stake in Microsoft Corporation (NASDAQ:MSFT) unchanged during the second quarter, billionaire Stephen Mandel‘s Lone Pine Capital reduced its position in the company by one-third to nearly 17.3 million shares during that time. Shares of the software giant have recouped all the losses they suffered earlier in this year by appreciating over 10% in the current quarter and are currently trading flat for 2016. Since the company’s balance sheet is in excellent condition right now and its free cash flows are on the rise, analysts are expecting it to hike its $0.36 per share quarterly dividend, which translates into an annual dividend yield of 2.53%, soon. On September 1, Synergy Research Group published its second-quarter report which showed that “the worldwide enterprise SaaS market grew 33% year on year to reach well over $11 billion in quarterly revenues”.  An important finding of the report was that, Microsoft Corporation (NASDAQ:MSFT) for the first time overtook Salesforce to become the overall enterprise SaaS market leader with a 15% market share in SaaS revenue during the second quarter. The number of hedge funds covered by us that were long Microsoft Corporation declined by 13 to 131 and the aggregate value of their holdings fell by over $2 billion to $18.82 billion during the April-June period.

#2 Franklin Resources, Inc. (NYSE:BEN)

– Shares Owned by Abrams Capital Management (as of June 30): 7.94 Million

– Value of Holding (as of June 30): $265.12 Million

Though the stock of Franklin Resources, Inc. (NYSE:BEN) is down by only 5% year-to-date, it is currently trading at a significant discount from the levels it traded at the beginning of 2015. A large part of the decline that the stock has seen in recent time has to do with the growing trend among investors to dump mutual funds in favor of passive vehicles like ETFs. According to Morningstar, in the last five years alone investors have redeemed $434 billion from roughly 3,000 mutual funds. On September 7, analysts at Credit Suisse released a note stating that the asset management industry, “which was always very fragmented and highly profitable (with low capital intensity), will become much more concentrated over the next five years – especially in U.S. retail with BlackRock (NYSE:BLK) and Vanguard clear winners.” In their note, they also mentioned that Franklin Resources, Inc. (NYSE:BEN) and Waddell & Reed Financial could both see among the largest net flow impacts from the new rule by the U.S. Department of Labor (DOL). While the ownership of Franklin Resources, Inc. (NYSE:BEN) among funds covered by us declined by one during the second quarter, the aggregate value of their holdings in it during the same time declined by $90 million to $1.81 billion.

#1 The Western Union Company (NYSE:WU)

– Shares Owned by Abrams Capital Management (as of June 30): 21.61 Million

– Value of Holding (as of June 30): $414.45 Million

In terms of value, The Western Union Company (NYSE:WU) continued to remain Abrams Capital Management’s largest equity holding at the end of June. The Western Union Company (NYSE:WU)’s stock has seen a notable correction in the last few days, but is still trading up by 9% for 2016. For its most recent quarter, the company reported EPS of $0.42, beating analysts’ estimate by $0.02, on revenue of $1.38 billion, which was in-line with analysts’ expectations and flat year-over-year. In July, analysts at Wells Fargo named The Western Union Company as one of the stocks in their list of 20 stocks with most upside potential vs. consensus. However, analysts at Monness Crespi & Hardt don’t seem to think that the stock has much upside potential at current levels. On September 9, they downgraded the stock from ‘Neutral’  to ‘Buy’ while keeping their price target unchanged at $22, which was very close to the price the stock was trading at on that day. In the period between April and June, the number of funds covered in our database that were long The Western Union Company inched down by one to 29 and the aggregate value of their holdings in it fell by 9.6% to $748.03 million.

Disclosure: None