In this piece, we’ll take a look at Top 5 Stocks to Buy According to David Abrams’s Abrams Capital Management. For more stocks, head on to Top 10 Stocks to Buy According to David Abrams’s Abrams Capital Management.
5. Alphabet Inc. (NASDAQ:GOOG)
Abrams Capital Management Stake: $278,399,000
Percentage of Abrams Capital Management’s Portfolio: 8.02%
Number of Hedge Fund Holders: 153
Founded in 1998, Alphabet Inc. (NASDAQ:GOOG) is a multinational technology holding company. Google is the most significant holding of the company, generating most of the company’s revenue. Google operates through two segments Google Services and Google Cloud. The Google Services division offers products and services. The Google Cloud division offers infrastructure and platforms. Alphabet Inc. (NASDAQ:GOOG) and other subsidiaries sell health technology and internet services. Abrams Capital Management doubled down on its investment in Alphabet Inc. (NASDAQ:GOOG), adding to the stake by 1888% during Q3 2022. The total investment of the fund in the company amounts to approximately $278 million.
On October 26, 2022, Mark Mahaney, an analyst at Evercore ISI, reduced his price target on Alphabet Inc. (NASDAQ:GOOG) to $130. The analyst currently has an Outperform rating on the company, and in a research note stated that his long-term view of the company remains positive despite a weak third quarter.
Here is what Mayar Capital has to say about Alphabet Inc. (NASDAQ:GOOG) in its Q3 2022 investor letter:
In early January this year – which admittedly feels like eons ago – US President Joe Biden was pushing Americans to take up the government’s offer of free COVID tests to help tackle the surging omicron variant. How did Biden respond when citizens asked about the availability of these tests?
“Google it!”
This advice, undoubtedly well-meant, was roundly scoffed at by the press, however. It seemed too obvious to be very helpful.
Anyway, the anecdote serves to introduce you to one of our largest holdings, Alphabet; the parent company of Google. Note that first, Alphabet’s original and core product – its search engine – has entered our common vocabulary as a verb. ‘Googling’ something has the same meaning as ‘researching’ or ‘finding an answer to’ something. Second the reason Biden’s advice was met with such opprobrium was because Googling something has become almost second nature to us now.
These two observations reveal a lot about Google’s strength in the search engine market, in which it has a share of over 90 percent. Because internet search is almost the prototypical network, Google has benefitted from – and we think is also protected by – the huge competitive advantage its scale brings – both to those asking the questions and those providing the answers. The Google search platform becomes increasingly useful to anyone seeking information as a greater volume of stuff becomes available. This starts a virtuous cycle that results in a colossal market share for Google itself. In the language of business strategists, Google benefits from vast network effects.
Because Google’s search results are viewed by billions of eyeballs every day, its search page ‘real estate’ is understandably very valuable to those with goods and services to sell. Advertising revenues from this ‘real estate’ as well as that from its other properties such as Mail, Maps, and so on, totaled almost USD 150b in 2021; amounting to almost 58% of the company’s revenues. Ad sales on YouTube, also owned by Alphabet, brought in another USD 28b. With the secular shift of the advertising spend to digital channels – over which Alphabet has a tight grip – we estimate the company has a share of around 40% of the digital advertising market and is probably the most valuable advertising property in the world… (Click here to see the full text)
4. TransDigm Group Incorporated (NYSE:TDG)
Abrams Capital Management Stake: $283,038,000
Percentage of Abrams Capital Management’s Portfolio: 8.16%
Number of Hedge Fund Holders: 66
TransDigm Group Incorporated (NYSE:TDG) was founded by W. Nicholas Howley and Douglas W. Peacock in 2003 and is headquartered in Cleveland. TransDigm Group Incorporated (NYSE:TDG) manufactures engineered aircraft components, systems, and subsystems. Abrams Capital Management did not change its position in the company’s stock during Q3 2022. The fund had an investment value of approximately $283.0 million in the company at the end of the third quarter.
On November 11, 2022, Scott Deuschle, an analyst at Credit Suisse, increased his price target on TransDigm Group Incorporated (NYSE:TDG) ‘s stock. The analyst now has a price target of $718 on the stock and stated that the company reported strong EBITDA and EPS in Q4 and raised FY23 adjusted EBITDA guidance by 1.5%, which is the reason why the analyst raised his price target.
Rowan Street Capital, an investment management company, mentioned DocuSign, Inc. (NASDAQ:DOCU) in its Q3 2022 investor letter. Here is what the fund said:
In the case of DocuSign, Inc. (NASDAQ:DOCU), the “Management” part no longer satisfies our requirements in order to remain in our investment portfolio. In the past 6-9 months, the company has had a huge turnover in both employees and upper management. In June of 2021, the board decided to get rid of Dan Springer, who had been a CEO of DocuSign since 2017 and took the company public in 2018. We found this decision strange as we thought that he actually did a great job growing the company over the past 5 years (revenues grew almost 5x from $519 million in 2017 to an estimated $2.4 billion this year).… (Click here to read the full text)
3. Asbury Automotive Group, Inc. (NYSE:ABG)
Abrams Capital Management Stake: $320,062,000
Percentage of Abrams Capital Management’s Portfolio: 9.22%
Number of Hedge Fund Holders: 27
Asbury Automotive Group, Inc. (NYSE:ABG) operates an automotive retailer in the United States. The company provides various automotive products and services, such as new and used vehicles, vehicle repair and maintenance, replacement parts, and accident repair services. As of December 31, 2021, Asbury Automotive Group, Inc. owned and operated 205 new vehicle franchises in the United States and 35 collision facilities. David Abrams kept his stake unchanged in Asbury Automotive Group, Inc. (NYSE:ABG) during Q3 2022. The holding in the company amounted to a value of $320 million at the end of the quarter.
On October 06, 2022, Rajat Gupta, an analyst at JPMorgan, reduced his price target on Asbury Automotive Group, Inc. (NYSE:ABG) to $185. The analyst currently has a Neutral rating on the stock and believes the macro slowdown is going to weigh on the company’s results in the near term.
Here is what LRT Capital Management has to say about Asbury Automotive Group, Inc. (NYSE:ABG) in its 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 carries 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 buy back stock and invest to improve its digital shopping experience. We wrote about Asbury in detail in our August 2021 Investor Letter.
2. Change Healthcare Inc. (NASDAQ:CHNG)
Abrams Capital Management Stake: $437,317,000
Percentage of Abrams Capital Management’s Portfolio: 12.6%
Number of Hedge Fund Holders: 53
Change Healthcare Inc. (NASDAQ:CHNG) is a leading independent healthcare technology platform that offers data and analytics-driven solutions to improve clinical, financial, administrative, and patient engagement results in the United States healthcare system. Change Healthcare Inc. (NASDAQ:CHNG) products are intended to improve clinical decision-making, streamline billing, collection, and payment processes, and provide a positive patient experience. Abrams Capital Management decreased its stake in Change Healthcare Inc. (NASDAQ:CHNG) by 7% during Q3 2022 and held 15,908,220 shares of the company as per the last filing of the fund.
On September 22, 2022, Investment bank Raymond James increased their price target on Change Healthcare Inc. (NASDAQ:CHNG) ‘s stock. The firm now has a price target of $635 on the company and currently has a Strong Buy rating on the stock. The recent settlement of the UnitedHealth/Change Healthcare (CHNG) trial is a positive event for the company, which will drive more upside, according to Raymond James.
Here is what Ave Maria specifically said about Change Healthcare Inc. (NASDAQ:CHNG) in its second quarter 2022 investor letter.
Change Healthcare Inc. (NASDAQ:CHNG) received an acquisition offer from UnitedHealth (UNH) at a price more than double our average purchase price in January of 2021. The acquisition subsequently failed to receive government approval, but to incentivize Change Healthcare shareholders to fight the issue in court, UnitedHealth promised to pay a dividend to Change Healthcare shareholders in the event of a deal break. The stock price rose accordingly, and we took the opportunity to exit Change Healthcare at an attractive price.
1. Lithia Motors, Inc. (NYSE:LAD)
Abrams Capital Management Stake: $504,422,000
Percentage of Abrams Capital Management’s Portfolio: 14.54%
Number of Hedge Fund Holders: 40
Lithia Motors, Inc. (NYSE:LAD) is a car dealership group operating in the United States. The business is divided into three segments: domestic, import, and luxury. Lithia Motors, Inc. (NYSE:LAD) provides new and used vehicles, vehicle financing, warranties, insurance contracts, vehicle and theft protection services, and automobile repair and maintenance also sell vehicle body and parts. The company has over 21,000 employees. David Abrams’s holding of Lithia Motors, Inc. (NYSE:LAD) remained unchanged during the third quarter of 2022, and the fund had an investment value of approximately $504 million in the company at the end of Q3 2022.
On October 21, 2022, Michael Ward, an analyst at Benchmark, reduced his price target on Lithia Motors, Inc. (NYSE:LAD) to $300 while keeping a Buy rating on the company’s stock. The company’s recent result was underwhelming as it missed the earnings estimates, which is why the analyst reduced his price target.
Here is what Oakmark Select Fund has to say about Lithia Motors, Inc. (NYSE:LAD) in its 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.
You can also take a look 5 Biggest Gig Economy Companies In The World and 5 Best Fast Growth Stocks to Buy Now.
