In this article, we take a look at the top 5 stock picks from David Abrams’ portfolio. If you want to check out our detailed analysis of Abrams Capital Management, go directly to David Abrams’ 2022 Portfolio: Top 10 Stock Picks.
5. Asbury Automotive Group, Inc. (NYSE:ABG)
Abrams Capital Management’s Stake Value: $339 million
Percentage of Abrams Capital Management’s 13F Portfolio: 7.92%
Number of Hedge Fund Holders: 29
Asbury Automotive Group, Inc. (NYSE:ABG) is a Fortune-500 auto dealership company headquartered in Georgia, US. Abrams Capital Management’s shares in the company make up 37% of total equity owned by 29 hedge funds.
On May 20, JPMorgan analyst Rajat Gupta lowered his price target on Asbury Automotive Group, Inc. (NYSE:ABG) to $200 from $225 and kept a Neutral rating on the shares.
Asbury Automotive Group has a trailing Price to Earnings ratio of just 5, typical in the dealership industry which has had low valuation for many years. It is trading at a far cheaper rate than the market, which is trading at multiple of 24 on average.
Here is what LRT Capital Management had to say about Asbury Automotive Group in their Q1, 2022 investor letter:
“Asbury Automotive Group is one of the largest automotive retailers in the United States. It operates 90 dealerships consisting of 112 franchises and 25 collision repair centers. The company’s stores offer new and used vehicles, parts, and service, as well as finance and insurance (F&I) products. Franchise agreements controlled by automotive manufactures and state laws create an environment of tightly controlled market entry and restricted competition.
The dealership industry is highly fragmented with 93.5% of dealers having only between 1-5 locations according to data from 2020. In fact, dealers with over 50 locations account for only 0.1% of the industry – a testament to the huge opportunity for consolidation that lies ahead. Industry dynamics, including the rising complexity of automobiles and the need for omnichannel distribution are favoring better capitalized and larger dealer groups. We believe Asbury Automotive Group has several distinct advantages, particularly its highly profitable parts and service business, its overexposure to the luxury vehicle business, which carriers the best margins, and its Clicklane omnichannel strategy. Asbury’s management has also been acting in the best interests of its shareholders by allocating capital towards acquiring dealerships to aggressively expand its business, and occasionally repurchasing stock when attractive acquisitions targets could not be found.
ABG is not a fast-growing SaaS business, but when paying a valuation of ¼ of the overall stock market, one does not need to make heroic assumptions about the future to enjoy strong returns as shareholders. We believe that over the next several years, Asbury will continue to acquire dealerships, occasionally buyback stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.”
4. TransDigm Group Incorporated (NYSE:TDG)
Abrams Capital Management’s Stake Value: $351 million
Percentage of Abrams Capital Management’s 13F Portfolio: 8.2%
Number of Hedge Fund Holders: 64
TransDigm Group Incorporated (NYSE:TDG) is an aerospace manufacturer based in Cleveland.
On May 11, Wells Fargo analyst Matthew Akers lowered his price target on TransDigm Group to $620 from $700 and kept an Overweight rating on the shares post the Q1 results.
Akers remains optimistic on TransDigm Group’s stock as the recent commentary from the Wells Fargo Industrials Conference supports enduring aftermarket strength while the company has begun to step up the stock buyback, supporting the share price from this point on.
Abrams Capital Management holds a little over 539,000 shares in the company but the lead stakeholder happens to be Stockbridge Partners that has invested $1 billion in TransDigm Group as of the first quarter of 2022.
Vulcan Value Partners brought up TransDigm Group in their Q2, 2021 investor letter. Here’s what they had to say:
“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.”
3. Change Healthcare Inc. (NASDAQ:CHNG)
Abrams Capital Management’s Stake Value: $370 million
Percentage of Abrams Capital Management’s 13F Portfolio: 8.63%
Number of Hedge Fund Holders: 50
Change Healthcare Inc. (NASDAQ:CHNG) provides payments and revenue cycle services, clinical and imaging services as well as patient and member engagement solutions.
On June 1, Citi analyst Daniel Grosslight raised his price target on Change Healthcare to $27.75, up from $25.75 and kept a Buy rating on the stock. The analyst said that the company’s fourth quarter results were better than expected and views the fiscal year 2023’s headwinds as temporary. Grosslight is appreciative of Change Healthcare’s risk/reward dynamic heading into this summer’s trial which is expected to determine UnitedHealth transaction’s fate.
Abrams Capital Management leads the 50 hedge funds invested in the company. The fund holds almost 17 million shares in the company as of the first quarter of 2022.
2. Alphabet Inc. (NASDAQ:GOOGL)
Abrams Capital Management’s Stake Value: $407 million
Percentage of Abrams Capital Management’s 13F Portfolio: 9.5%
Number of Hedge Fund Holders: 160
Alphabet Inc. (NASDAQ:GOOGL) is the third largest technology company and the fourth largest corporation in the world with a market cap of $1.7 trillion as of the first quarter of 2022.
On June 2, Piper Sandler analyst Thomas Champion lowered his price target on Alphabet to $2,775, down from $2,900 and kept an Overweight rating on the stock. Champion told investors in a research note that after two years of stretch, digital advertising spend is on its way to recovery, implying a boost in Alphabet’s revenue with its 29% market share in digital advertising.
Alphabet Inc. (GOOGL) confirmed a 20 to 1 stock split in its February earnings release. Investors that own shares on the record date of July 1 will each receive 19 additional Google shares for each one they hold on July 15.
Farrer Wealth Advisors mentioned Alphabet Inc. in their Q1, 2022 investor letter. Here’s what they said:
“We won’t waste much time trying to explain to our clients why Alphabet is such a phenomenal business, we believe that is quite self-evident. The better explanation is why we never bought Alphabet before. The reason was a personal bias we held based on three beliefs (which we now believe to be incorrect)
Growth in YouTube would stall as the increased ad-load would turn-off viewers (the double ad-load at the beginning of videos for example). Consumers will focus on discovery rather than search to purchase new items. For example – using Instagram/TikTok to decide what new clothes to buy instead of ‘googling’ for clothes. Other Bets: In general, we felt that capital spent on “Other Bets” has been a bit wasteful with the segment earning just around $3.1bn in revenue versus nearly $21bn in operating losses over the last five years…” (Click here to see the full text)
1. Lithia Motors, Inc. (NYSE:LAD)
Abrams Capital Management’s Stake Value: $705.6 million
Percentage of Abrams Capital Management’s 13F Portfolio: 16.46%
Number of Hedge Fund Holders: 46
Lithia Motors, Inc. (NYSE:LAD) is another automotive dealership company to make it to the list of David Abrams’ top 10 stock picks and it happens to be the number one. Not only is it number one in Abrams Capital Management’s top 10 stock picks, the fund is also the lead stakeholder with equity ownership worth $705.6 million.
On April 21, Wells Fargo analyst Colin Langan lowered his price target on Lithia to $350, down from $362 following Q1 results. Langan kept an Overweight rating on the shares.
Lithia Motors is a dividend paying stock. Shareholders of record on May 13 were paid a quarterly dividend of $0.42 per share on May 27. Lithia has been increasing the amount it pays out in dividends for 13 consecutive years, with a dividend payout ratio of 4%, indicating that its strong commitment to sustain as well as grow dividends.
Here is what Oakmark Funds had to say about Lithia Motors in their Q1, 2022 investor letter:
“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”
“As is typical during periods of significant volatility, we added a new name to the portfolio. Lithia Motors (NYSE:LAD) is the largest franchised auto dealer group in the United States. The company has a long history of creating shareholder value through best-in-class operations and consistent acquisitions of smaller dealers at attractive returns. There is a long runway for management to continue creating value through such acquisitions. Management believes this will drive earnings per share to more than $50 by 2025, even as car prices return to pre-pandemic levels. Meanwhile, Lithia has a significant opportunity to further accelerate growth through Driveway, its online auto retailing platform. We believe Lithia’s existing nationwide infrastructure provides Driveway with significant competitive advantages in e-commerce, which smaller dealers will struggle to replicate. Driveway is not generating any earnings today, but it could become a major contributor over the next five to seven years. With the stock priced at less than 7x management’s 2025 EPS target and with substantial future growth potential from Driveway, we believe Lithia shares are a bargain today.”
You can also take a peek at 5 High-Yield Dividend Stocks to Buy According to John A. Levin’s Levin Capital and 3 Defensive Stocks to Buy in 2022 According to Seth Klarman
