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David Abrams founded Abrams Capital Management in 1999 after working with the famous Seth Klarman (founder of the Baupost Group) for 10 years. Since then, his annualized return has consistently hovered around an impressive 20% (net of fees).

Abrams is a well-rounded man and it shows in his investing philosophy. One of the few successful hedge fund managers to have an undergraduate degree that is not in finance or business, Abrams focuses on finding companies that have great management and solid numbers. Specifically, he looks for companies in which the CEO has a controlling stake or in which the CEO’s compensation is primarily stock-based (check out Abrams on investment strategy here).

This methodology may have served him well for over a decade but his performance since the end of the second quarter is not so impressive. Since the end of June, Abrams’ top stock picks in his 13F portfolio have produced a negative 13.5% return, compared to the slightly more robust S&P 500 ETF (NYSEARCA:SPY), which had a -10.5% return for the same period.

Company

Ticker

Value (x1000)

Activity

Return

SLM CORP

SLM

166355

0%

-17%

BLOCK H & R INC

HRB

163295

0%

-16%

LIBERTY MEDIA CORP NEW

LINTA

135414

0%

-10%

ARBITRON INC

ARB

122522

-0%

-16%

CROWN CASTLE INTL CORP

CCI

110051

0%

1%

LAMAR ADVERTISING CO

LAMR

76089

NEW

-28%

TEVA PHARMACEUTICAL Bond

TEVA

70613

1050%

-17%

CAREFUSION CORP

CFN

46189

0%

-6%

MCGRAW HILL COS INC

MHP

42529

NEW

-10%

CLEAR CHANNEL OUTDOOR

CCO

42127

0%

-18%

PENNYMAC MTG INVT TR

PMT

18949

0%

1%

RBS PREF T

RBS

11030

NEW

-21%

RBS PREF M

RBS

10320

NEW

-21%

RBS PREF N

RBS

5975

NEW

-21%

RBS PREF S

RBS

5464

NEW

-21%

LUBRIZOL CORP

LZ

SOLD OUT

1%

IRON MOUNTAIN INC

IRM

SOLD OUT

-9%

These losses come on the tail-end of several major purchases. In fact, many of Abrams’ top picks since the second quarter are mostly new stocks. He identified some he liked and bought in big, buying a $76 million position in Lamar Advertising (NASDAQ:LAMR) and $42.5 million in McGraw Hill Companies Inc (MHP), as well as significant positions in RBS.

While these have produced negative returns (-28%, -10% and -21% respectively), the buzz is that they may be on a comeback. For example, McGraw Hill has been a popular stock lately, with Barry Rosenstein’s Jana Partners buying an activist stake (Read more here) and several other large hedge funds investing millions in the publishing company.

While we like Abrams, investors are cautioned against mirroring him right now. Out of his top stock picks, only 3 stocks have generated positive returns – Crown Castle International Corp (NYSE:CCI), Lubrizol Corp (LZ) and Pennymac Mortgage Investment Trust (NYSE:PMT). Each earned Abrams Capital a mere 1% return since the end of June. With this type of marginal performance, investors should only mirror Abrams if they are able to sustain losses in the short term and hold their positions until the market turns.


Disclosure: I am long SPY.

Source: Abrams Capital's Bullish Stock Picks