The investment firm of guru investor David Abrams (Trades, Portfolio) established major positions in managed-health care giant Aetna Inc. (AET, Financial) and one of North America's largest midstream energy suppliers, Kinder Morgan Co. (KMI, Financial).
In the first quarter of the year, Abrams’ top buy represented more than 7% of the portfolio, while the energy infrastructure company represented 4%.
Abrams Capital Management closed its stake in Wells Fargo & Co. (WFC, Financial). The guru held as much as 10% interest in the U.S. global bank headquartered in San Francisco just four years ago.
And Abrams dumped shares of a Los Angeles-based real estate and investment management firm that is in financial distress. GuruFocus shows Colony NorthStar Inc. (CLNS, Financial) could face bankruptcy in two years or less.
In a portfolio of more than $3 billion, Abrams has a total of 20 stocks. Of those stocks, 38% represent the financial services sector, 22% consumer cyclical, 19% health care, 6.8% utilities, 5.3% industrials, 3% real estate and 4% energy.
His largest stake in the $3 billion portfolio is Western Union Co. (WU, Financial), which holds 13% portfolio space. His two other top positions are in Teva Pharmaceutical Industries Ltd. (TEVA, Financial) and Time Warner (TWX).
The Seth Klarman (Trades, Portfolio) protégé sticks to U.S.-based companies where the CEO has a significant stake or where the CEO’s salary is primarily stock-based.
Aetna Inc.
Abrams bought more than 1.3 million shares for an average price of $179 a share. His total estimated gain since he opened the position is a loss of 2%.
The Connecticutt-based managed-health care organization has more than 22 million medical members.
Shares were trading at over $176.49 a share, up 1%, on Monday afternoon. The stock has been a long-term strong performer, having increased more than 195% in value over the last five years. Year to date, it is down 2%.
The Peter Lynch chart suggests the stock is trading significantly above fair value. The median is $86 a share.
The company has averaged annual earnings of 10.6% over the last 10 years. But its return on equity of 22.62% underperforms 69% of the 27 companies in the Global Health Care Plans industry.
Revenue at the end of 2017 was $60.5 billion, while net income stood at $1.9 billion. Its long-term debt and capital lease obligations stood at $8.1 billion in 2017. It reported a loss in free cash flow of $874 million.
The company provides a dividend yield of 1.14%. GuruFocus ranks it 5 out of 10 in financial strength and 6 of 10 in profitability and growth. It has a market cap of $57 billion.
In the future, analysts are predicting a three- to five-year growth rate in earnings per share of 12.6%. The forecast is for earnings of $11 per share at the end of 2018. Forecasts for 2020 reflected earnings of $13 per share.
Forecasts show revenue climbing to over $73 billion in 2020, compared with $61 billion at the end of the year.
Guru shareholders include the Vanguard Health Care Fund(Trades, Portfolio), Chris Davis (Trades, Portfolio) and Larry Robbins (Trades, Portfolio).
Kinder Morgan
As Brent crude oil reached $70 a barrel this month, North America’s largest midstream energy provider basked in the recent optimism of counterparts in the energy sector.
The Houston-based company is hoping a surge in the sector will dramatically improve declining sales and negative earnings over the past five years. When oil prices hit rock-bottom in 2014, among the hardest hit companies were midstream producers. Many went bankrupt.
In the first quarter, Abrams bought 8.4 million shares for an average price of just over $17 a share. The investment has produced an estimated loss of 4%.
Kinder Morgan owns the infrastructure, including pipelines, that are used to transport, store and process natural gas, refined petroleum products and crude oil. It is also the largest handler of ethanol in the country, according to GuruFocus.
Its stock has tumbled 59% over five years. Year to date, its performance has been improving as energy stocks become more popular with investors.
Kinder Morgan’s stock declined 12% year to date, but, like many in its sector, was up in Monday trading. Kinder Morgan rose 0.67% and stood at $16.62 a share. The stock’s 52-week range is $14.69 to $21.25 a share.
The Peter Lynch chart, which is somewhat incomplete because the company hasn’t had positive earnings in five years, suggests the stock is trading above its fair market value.
Kinder Morgan’s poor return on equity reflects its dismal performance over the last several years. Its return on equity is 0.32%, which islower than 84% of 104 companies in the Global Oil and Gas Midstream Industry. The company has a price-book of 1.09 times, which is higher than the majority of its peers, and price-sales of 2.70, which is lower than the majority of its peers.
The company provides a dividend yield of 3.45%.
The company has struggled for five years to make a profit, reporting average annualized earnings of -16.10. It reported $13.7 billion in revenue in 2017. Revenues hit $16 billion several years ago and have been in decline ever since. It reported net income of $183 million in 2017 from over $1 billion four years ago.
It has been whittling away at long-term debt, which stands at $35 billion, compared to $42 billion in 2015.
Analysts are forecasting Kinder Morgan will reach $14.3 billion in revenues in 2020. The forecast also predicts a growth rate in earnings per share over the three- to five-year period of 11.49%.
A number of gurus hold the stock, including Mario Gabelli (Trades, Portfolio), David Tepper (Trades, Portfolio) and the hedge fund of T. Boone Pickens.
Reducing bookseller
Abrams has been scaling back ownership in the college booksellers unit of Barnes & Noble Inc. (NYSE:BKS) that went public almost three years ago. In the fourth-quarter, he sold off a significant number of shares in order to reduce his ownership stake in Barnes & Noble Education Inc. (NYSE:BNED) to 13%.
In April, he sold off another 47,000 shares. The investment has posted an estimated loss of over 50%. He currently holds about 6 million shares of the company. In total, he's sold more than 2 million shares.
The New Jersey-based Barnes & Noble Education appears to be on the opposite side of a major shift in the way college students buy textbooks. The company operates more than 700 on-campus bookstores at colleges and universities across the U.S. But a growing number of college students are looking to rent textbooks and other products online or check out in local public libraries and book-sharing communities, as a way to save on college.
The campus bookseller has seen a dramatic drop in its market cap in the last two years. The market cap for Barnes & Noble Education has tumbled to $314 million from $437 million in the spring of 2016.
On Monday, its market cap stood at $290 million while shares were down 2% to $6.19 a share.
