Hmm….This Bostonian Hedge Fund Is Bullish Alright
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Abrams Capital Management is one of the largest hedge funds in Boston. The fund is run by David Abrams, and has a $5 million minimum requirement. Currently valued as an equity portfolio alone worth $1.1 billion, Abrams’ investment vehicle primarily invests in financial, services and basic materials stocks and tends to favor securities that are undervalued. In accordance with our market-beating strategy, we’re going to take a look at this hedge fund’s favorite stocks for 2013.
With 15 million shares, SLM Corp (NASDAQ: SLM), also known as Sallie Mae, holds the top position in the fund. If Abrams is looking for value, he got it right with SLM, which is priced at 2 times its book value, versus Discover Financial Services and World Acceptance Corp, which are priced 2.4x and 3.0x, respectively. The stock has been trading in an uptrend over the past six months, boosted by a 14% dividend increase from last year, strong technicals, and a recent drop in loan defaults. The company has also improved administrative costs in regard to loan servicing and processing, which has improved their bottom line from $633 million to $939 million.
Coming in at number two is Lamar Advertising (NASDAQ: LAMR). The billboard and transit advertising maker has consistently improved its bottom line by cutting cost of goods sold/revenue to 35% from 36% in 2011. Abrams added Lamar to his portfolio during the second quarter of 2011 and currently owns 5.5 million shares. But if Abrams was looking for value, he clearly did not find it here. The stock trades at 5 times book value and is valued at an eye-popping 476 times its earnings per share. Lamar enjoys an obvious advantage given the large barriers to entry in this market, which probably explains why it continues to find buyers. The stock is attempting to break resistance at $48.00, with the next target at $50.00.
Number three is Nexen (NYSE: NXY), which was a new addition to Abrams Capital during the fourth quarter of 2012. Abrams has a 7.1 million position in the Canadian oil and gas company, which was recently acquired by China’s CNOOC Ltd for $27.50 in cash. Even if Abrams bought the stock on the last day of the year, he still would have made over half a million dollars at the time of the sale. Not a bad profit for a few days work.
The fourth stock of Abram Capital’s top five is Teva Pharmaceuticals (NYSE: TEVA). The Israeli drug manufacturer has had a very eventful 2013. It just recently moved over to the NYSE from the NASDAQ in May 2012 and since then, the stock has swung wildly between $45 to $37 per share. This month, Teva announced it would no longer sell the sedative Propofol to corrections facilities that use the drug for lethal injections. Shares were also downgraded by Wells Fargo to a “perform” from “outperform.”
In addition, new generics that are coming to market on Copaxone and Provigil, Teva’s profitable drugs, are seen as near-term negatives. On the plus side, the stock is priced at only 18 times trailing earnings against a sector average of 102 times earnings, and the company has a global presence with recent moves into emerging markets. As the Affordable Health Care Act comes into full swing in 2014, the demand for generic drugs (which Teva dominates) and the requirement for more doctors to prescribe generics look to play out very nicely.
Finally, finishing the list of top five is Wesco Aircraft Holdings (NYSE: WAIR). Since acquiring WAIR during the first quarter of last year, Abrams has increased his holding of the company by 14,340%. Obviously, there is something very enticing about this airline parts and services company. Its bottom line has improved very dramatically as it continues to cut costs in tandem with rising revenues, and the stock is priced 2 times its book value compared to 4 times book for the sector. As airlines continue to consolidate and consumer demand improves, the trickle down effect on those companies that keep the planes flying will become more prominent. Analysts rate the stock a buy with their next target at $15.90.
In short, Abrams’ strategy of investing in undervalued stocks is quite evident from most of these top five picks; Lamar is the only one priced expensively compared to the rest of the market. The hedgie’s equity portfolio is concentrated among 16 stocks in diverse sectors, such as pharmaceuticals, finance and services, with Sallie Mae, Wesco and Teva all looking like solid bets at the moment.
This article is written by Amy Thielen and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!