Table of Contents
- Introduction
- About Abrams Capital & David Abrams
- Abrams’ Value Investing Strategy
- Current Economic Climate
- Methodology for Choosing Stocks
- Abrams Capital’s Top 10 Stock Picks
- Camping World Holdings (CWH)
- Tempur Sealy (TPX)
- Willis Towers Watson (WTW)
- U-Haul (UHAL)
- Coupang (CPNG)
- Energy Transfer (ET)
- Meta Platforms (META)
- Alphabet (GOOG)
- Asbury Automotive Group (ABG)
- Lithia Motors (LAD)
- What Makes These Good Investments
- Advice for Investors
- FAQs
Introduction
Legendary value investor David Abrams has built immense wealth for his investors over the past two decades. His hedge fund firm, Abrams Capital Management, utilizes a long-term value investing strategy modeled after renowned investors like Warren Buffett.
Abrams looks for undervalued stocks trading below intrinsic value that have the potential for significant upside. While volatility continues rattling the markets, Abrams remains convicted in holdings he believes can deliver alpha over full market cycles.
Analyzing Abrams Capital’s latest regulatory filings offers clues into which stocks Abrams sees as compelling investments right now amidst the uncertain economic backdrop.
This article reveals Abrams Capital’s top 10 stock picks heading into 2023 and discusses why it believes these companies represent strong investment opportunities.
About Abrams Capital & David Abrams
Abrams Capital Management was founded in 1999 by David Abrams, who leads the Boston-based investment firm as CEO and portfolio manager. Abrams honed his craft working under value legend Seth Klarman at Baupost Group for many years.
Abrams relies on fundamental analysis to invest in public equities and private companies he determines are undervalued by the broader market. His firm seeks to understand intrinsic business value based on long-term cash flow generation.
As a long-biased, long horizon investor willing to ride out volatility, Abrams searches for that rare combination of quality and value – good businesses trading at discounts to fair value. Patience and discipline are key tenets of his strategy.
While many hedge funds utilize leverage and complexity, Abrams Capital distinguishes itself by its simplicity. The firm invests primarily in cash equities rather than derivatives, and avoids leverage in order to mitigate risk.
Abrams’ proven approach has delivered exceptional results over two decades. Despite a modest dip in AUM in 2022, Abrams Capital has compounded capital at impressive rates to reach over $3 billion in assets under management:
Under Abrams’ leadership, the firm has executed a differentiated strategy that accrues value throughout market cycles.
So when a world-class investor like David Abrams makes major moves in today’s turbulent markets, smart investors should pay attention.
Abrams’ Value Investing Strategy
Abrams employs a long-term value investing approach in selecting investments, influenced by mentors like Warren Buffett and Seth Klarman.
At its core, Abrams Capital’s strategy relies on determining a company’s intrinsic value based on long-run discounted cash flows. It then seeks to invest at a significant discount to intrinsic worth.
This strategy requires rigorously studying businesses, their managers, competitive dynamics, financials, and growth trajectories. Abrams looks for quality companies with moats and long runways that are mispriced by markets.
His proven approach searches across industries and market caps for opportunities meeting its criteria:
- Enduring Competitive Advantages – The business has a durable moat from scale, network effects, cost advantages, brand, patents, or other barriers to entry. This grants pricing power and resiliency against rivals.
- Capable Management – The right leaders are at the helm who allocate capital wisely by reinvesting into defensible & high ROI projects. Management’s interests should be aligned with shareholders.
- Financial Strength – The company exhibits consistent free cash flow generation and a solid balance sheet. This provides downside protection and strategic flexibility.
- Margin of Safety – The current valuation offers a sizable discount to estimated intrinsic value, providing capital appreciation upside as the gap closes.
Abrams holds concentrated positions in its highest conviction names for long durations, allowing the upside to compound over many years.
This proven approach has delivered outsized risk-adjusted returns throughout different market environments since 1999.
Current Economic Climate
Entering 2023, uncertainty still permeates markets amidst global macroeconomic challenges. Lingering impacts from COVID, soaring inflation, rising interest rates, and recessionary signals have whipsawed stocks.
Yet recent data indicates inflation may have peaked and the Fed’s aggressive rate hikes are slowing price growth. This sparked a rally toward year-end, though volatility is likely to remain elevated.
Navigating these cross-currents requires an experienced hand at the helm. This market moment seems tailored for astute value investors like Abrams searching for world-class companies discounted by the turmoil.
Abrams maintains conviction that long-term oriented value investing backed by fundamental diligence remains the best strategy, regardless of market gyrations.
Analyzing which specific stocks Abrams Capital deployed capital into last quarter provides perspective into where it sees pockets of opportunity. Let’s examine Abrams’ top 10 holdings and investment thesis behind each.
Methodology for Choosing Stocks
To surface Abrams Capital’s highest conviction stock picks headed into 2023, we analyzed the firm’s SEC Form 13F filing for Q3 2022. This regulatory document discloses the long equity positions held by hedge funds and other institutional investment managers above a certain size threshold.
By studying the largest and most concentrated positions in Abrams’ equity portfolio this past quarter, we can infer its top stock ideas poised to deliver alpha.
Here are the 10 biggest stock positions Abrams Capital held at the end of Q3 2022:
Abrams Capital’s Top 10 Stock Picks
1. Camping World Holdings (CWH)
Abrams Investment: $104 million
Thesis: Camping World dominates the niche recreational vehicle dealership industry. Growing interest in outdoor activities and RV travel bodes well for the company. CWH boasts an attractive margin profile and is expanding its national footprint to drive growth.
2. Tempur Sealy (TPX)
Abrams Investment: $156 million
Thesis: As the world’s largest bedding provider, Tempur Sealy enjoys economies of scale advantages. Steady cash generation funds market expansion and a dividend near 5%. The maturation of its Tempur-Pedic and Sealy integration provides operating leverage.
3. Willis Towers Watson (WTW)
Abrams Investment: $168 million
Thesis: Willis Towers Watson is among the world’s leading insurance brokers. Its recent merger with Aon fortifies the company as aleader in risk advisory, insurance, reinsurance, and human capital consulting. Resilient through cycles, WTW generates robust cash flow to fund growth initiatives and capital returns.
4. U-Haul Parent Amerco (UHAL)
Abrams Investment: $191 million
Thesis: Amerco owns U-Haul, the leading do-it-yourself moving equipment rental service in North America. Over 50% market share in a defensive, needs-based industry generates dependable cash flows. Vertical integration, economies of scale, and pricing power provide structural competitive advantages that can’t be easily replicated. The asset-light business throws off significant FCF to compound growth over time.
5. Coupang (CPNG)
Abrams Investment: $191 million
Thesis: Often dubbed “The Amazon of South Korea”, Coupang is the country’s largest e-commerce retailer revolutionizing shopping through its end-to-end logistics network. The company is still in the early stages of unlocking the online consumption opportunity in Asia’s 4th largest e-commerce market. With market leadership, secular growth trends in its favor, and investments in expanding selection and fulfillment infrastructure, Coupang has a substantial runway for continued success.
6. Energy Transfer (ET)
Abrams Investment: $250 million
Thesis: Energy Transfer is one of the world’s largest midstream energy infrastructure companies, operating pipelines transporting natural gas, crude oil, and refined products. Soaring commodity prices this year highlight the essential nature of ET’s infrastructure assets. With an improved balance sheet after debt reduction, ET pumps out sizable cash flow to fund distributions yielding over 7%.
7. Meta Platforms (META)
Abrams Investment: $278 million
Thesis: Meta Platforms dominates social media with over 3.5 billion monthly users across its Facebook, Instagram, and WhatsApp platforms. One of the world’s most profitable digital advertising platforms benefits from powerful competitive advantages in network effects, data insights, and financial strength. Meta is investing aggressively into its next phase targeting VR/AR technologies and the metaverse. If this pays off, META could re-rate substantially higher.
8. Alphabet (GOOG)
Abrams Investment: $303 million
Thesis: Global tech titan Alphabet is well-positioned to keep winning across digital ads, cloud computing, and long-term tech trends. GOOG generates over $50 billion in highly recurring free cash flow to fund growth initiatives and capital returns. With its unmatched innovation engine, vast moat in core markets, and balance sheet boasting over $125 billion in cash, Alphabet has plenty of dry powder to drive the next leg of upside.
9. Asbury Automotive Group (ABG)
Abrams Investment: $485 million
Thesis: Asbury owns and operates car dealerships selling new and used vehicles across 95 locations nationwide. Luxury and mid-line brands have pricing power that holds up better during downturns. ABG throws off sizable cash generation to compound growth through acquiring high quality dealership assets when attractive opportunities emerge. The company is also aggressively repurchasing stock while cheap.
10. Lithia Motors (LAD)
Abrams Investment: $706 million
Thesis: Major auto retailer Lithia Motors sells new and used vehicles across 215 dealership locations in 22 states. Benefiting from its leading market position, Lithia is consolidating the highly fragmented auto dealership industry. Acquisitions growth supplements organic growth, fueled by a smart digital strategy and opportunities in used vehicle markets. LAD has a long runway for expansion and margin improvement in a defensive, critical industry.
What Makes These Good Investments
Several connecting threads stand out when analyzing Abrams Capital’s favorite stock ideas this past quarter.
Most of the companies boast strong market positions as either industry leaders or consolidators gaining outsized share. Competitive advantages afforded by scale, branding, data assets, distribution infrastructure, and financial strength provide economic moats allowing these businesses to generate dependable profits over long horizons.
Interestingly, several picks like U-Haul parent Amerco, Lithia Motors, and Asbury Automotive Group are either directly tied to transportation and auto sectors or have large auto dealer exposure. This suggests Abrams sees unique value opportunities here.
Many also throw off considerable free cash flow to support growth, acquisitions, dividends, and buybacks – criteria important for value investors. Companies like Alphabet and Meta Platforms sit in pole position to benefit from long-term digital transformation tailwinds.
Viewed together, concentration in these names expresses Abrams Capital’s conviction in companies with durable moats and multi-year growth runways available for purchase at discounts today.
This portfolio of elite franchises stacks the deck in favor of compounding gains over time as temporary macro concerns subside. Scaling into world-class businesses while they trade on sale looks like a winning strategy in these turbulent markets.
Advice for Investors
Legendary investor Howard Marks wisely stated “Being right doesn’t lead to superior performance if the consensus forecast is also right.” As consensus economic outlooks skew quite dour entering 2023, contrarians like David Abrams see opportunities abound.
History has shown that more money is lost anticipating recessions than gained trying to time markets. Meanwhile countless fortunes have compounded for long-term investors buying great companies during periods of fear like today.
Abrams Capital’s moves clearly telegraph its belief that current volatility offers a golden buying moment. My advice for investors watching from the sidelines – get invested in this elite list of companies while Wall Street panics!
FAQs
What is Abrams Capital’s investment strategy?
Abrams Capital utilizes a long-term value investing strategy modeled after famous investors like Warren Buffett. The firm analyzes fundamentals to determine a company’s intrinsic worth based on long-term cash generation. It then aims to invest at substantial discounts to intrinsic value.
What stocks does Abrams Capital like this year?
Analyzing Abrams Capital’s recent SEC filings reveals its high conviction stock picks. The hedge fund’s top 10 holdings consist of companies like Camping World, Lithia Motors, Coupang, Meta Platforms, Alphabet and more.
How was this list compiled?
We examined Abrams Capital’s regulatory 13F filing for Q3 2022 detailing its long US stock positions. By studying the largest and most concentrated holdings, we inferred Abrams’ top ideas poised to deliver alpha.
Is now a good time to invest?
Volatility often breeds opportunity. While consensus economic outlooks look dreary entering 2023, contrarians like Abrams Capital see the current moment as opportune time to scale into world-class businesses at discounts. Historical data shows long term investors are rewarded by buying during periods of acute bearishness.
