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Rupert Hargreaves
Rupert Hargreaves
Articles (1237)  | Author's Website |

Abrams Capital Management Buys Moats in March Selloff

David Abrams made several portfolio changes during the first quarter of 2020

David Abrams (Trades, Portfolio)' Abrams Capital Management made several significant changes to its portfolio during the first quarter of 2020.

According to the hedge fund's latest 13F, which is filed with the SEC at least 45 days after the end of each calendar quarter, Abrams and team added two positions to the portfolio during the period, while boosting holdings in five others, reducing one and selling out of one holding entirely.

Portfolio changes

The most significant change was the decision to dump O'Reilly Automotive (NASDAQ:ORLY). Abrams has owned O'Reilly since the third quarter of 2017. At one point, the stock made up as much as 12% of the portfolio. At the end of 2019, it made up 7% of the overall portfolio, making it a top-three position for the $2.5 billion fund.

O'Reilly is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories. The stock plunged rapidly towards the end of March as the scale of the Covid-19 crisis became evident. We don't know when Abrams decided to divest the position, or at what price. Nevertheless, considering his initial acquisition price was around $215, it seems highly likely that he made a profit on the position. Shares in the industrial firm only declined to a low of $263 in the selloff. Wall Street analysts are expecting the company to report a marginal decline in earnings per share this year. The stock is trading at a forward price-earnings multiple of 21.6.

Moving away from O'Reilly, one of the two positions that made it into Abrams' portfolio during the first quarter was TransDigm Group Inc (TDG). He acquired just over half a million shares in this company during the three months, giving it a 6.8% portfolio weight.

The manufacturer of aircraft components has seen its share price fall by more than 50% in the past few weeks. While the aerospace industry is facing unprecedented pressure,  this is not the sort of industry where any company can enter the field and start to make components. This gives TransDigm Group Inc. a definite competitive advantage and economic moat.

Energy Transfer Partners LP (ETP) also made it into the value investor's portfolio last quarter. Abrams wasn't the only guru buying shares in the company, either. Seth Klarman (Trades, Portfolio) and David Tepper (Trades, Portfolio) also acquired positions.

The energy storage and transportation partnership looks to trade cheap on many traditional metrics that value investors consider. It is trading just below book value at the time of writing and offers a forward dividend yield of nearly 18%. The consensus forward price-earnings multiple is around five, while the current price to free cash flow multiple is 2.3. These compare favorably to their respective five-year averages of 10 and 4.9.

Abrams increased his position in Facebook (NASDAQ:FB). He now owns 1.2 million shares in the social network, giving it a 7.9% portfolio weight. Abrams also used the market decline to snap up shares in Google's parent company Alphabet (NASDAQ:GOOGL). He increased his holding by 21% to 146,000 shares. The position now has a 6.7% portfolio weight. Kinder Morgan (NYSE:KMI), Asbury Automotive Group Inc (NYSE:ABG) and O-I Glass Inc (NYSE:OI) were added to the portfolio as well.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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