I like to study the portfolios of value investors who have put together lengthy and outstanding track records. For example, a review of the equity offerings of value-based fund groups such as Berkshire Hathaway, Third Avenue Funds, or Tweedy, Browne could point to potential investment opportunities. A fund's shareholder report, which lists its recent holdings, can usually be requested over the Internet, or in writing. In my case, I get it from whalewisdom.com.
I never buy a stock because a highly touted professional investor has done so. You should understand and have confidence in the logic of the decision to avoid buying or selling at the wrong time or for the wrong reason. In the article I detail some 'high conviction' holdings from Abrams Capital Management. David Abrams worked at Seth Klarman's Baupost Group for 10 years. In the nearly 12 years since Abrams started his fund he has achieved an annualized return of around 20 percent (net of fees).
Lamar Advertising (LAMR)
Lamar Advertising went up approximately 15% in the last few days because UBS speculated that the company may do better as a real-estate investment trust, citing legal experts who believe billboards make good real-estate assets.
When I evaluate LAMR I note that shares are undervalued. In order to value LAMR it is important to compare it to Clear Channel (CCO). Lamar now trades at a mere 8.7% premium to CCO on the EV/EBITDA metric on F2012 EBITDA. I believe that premium should be wider in an efficient market as LAMR is clearly the most liquid way to play the Outdoor advertising sub-space and also is focused completely on North America. In addition, LAMR is not focused on transportation advertising (which carries lower margins due to revenue share) and has a much broader digital platform, ROICs and margins of which are vastly superior to static signage (CCO expertise).
Lamar has grown its localized billboard advertising businesses through a combination of organic
growth and strategic acquisitions. The company invested roughly $107 million in 2011 and plans to invest similar amount in 2012 to improve its existing displays, construct new advertising structures which are expected to help Lamar to increase its market share in outdoor advertising markets.
I like this pick considering LAMR current undervaluation and business prospects.
H&R Block Inc. (HRB)
I like HRB because its management is committed to increasing shareholder value via share buybacks. In the last earnings call, management repurchased nearly 7% of HRB's shares outstanding since quarter-end, and it appears management is positioned to have the minimum net worth covenant removed in the coming months. This will create the scenario for increased share repurchases in the near future. Overall, the release is generally consistent with management' s prior expectations, although it provides additional confidence that management remains focused on returning capital, which I believe is the primary near-term catalyst for the stock. With $900 million remaining on the company's share repurchase authorization (just extended to June- 2015), a history of aggressive repurchases below the $15 level and the likely removal of the minimum net worth covenant later this summer makes me confident to recommend this stock.
SLM Corp (SLM)
I like SLM. The company has solid financials and a resilient business model. I read an interesting report from FBR Capital, which explains several positive factors in SLM:
- Improving credit scenario which increases earnings growth,
- ability to return substantial amounts of capital,
- manageable regulatory and legislative environment,
- attractive valuation ($21 target).
I think that SLM is uniquely positioned in the financial industry. The company is not exposed to many of the issues concerning investors: low interest rate environment, extreme price competition for assets, European exposure, etc. Furthermore, I believe Sallie Mae may prove a hedge to a slowing economy, given that a slowing economy increases Romney's odds of winning the presidential election, resulting in a much better political environment for Sallie Mae.
I like both SNY and Teva Pharmaceutical (TEVA). Sanofi has a diversified product portfolio with a strong presence in several therapeutic areas including cardiovascular diseases, diabetes, oncology and CNS disorders among others. The company´s diabetes segment has been performing well with its lead product, Lantus, crossing the 1 billion mark in the fourth quarter of 2011. Shares are clearly undervalued. SNY is trading at just 7.1x earnings, a significant discount to the 12.7x average for the industry and 13.7x for the S&P 500.
Other stocks that Abrams likes
Abrams invested a considerable position in Google (GOOG). I like this pick. Google' s history of execution is unparalleled. Over the past five years, revenue has grown at a CAGR of 18.0%, gross profit dollars at a CAGR of 19.9% and operating profit dollars at a CAGR of 11.6%. The strong double-digit growth is indicative of management execution. Apart from the core search business, which continues to grow strongly, the company has successfully integrated some major acquisitions (AdMob, DoubleClick, YouTube, ITA and Motorola Mobility to name a few), which provided it with the kind of technology required for sustained growth in a highly dynamic and competitive market. While the existence of operating leverage is evident from the past few years
results, operating profit dollars have been impacted by significantly higher R&D and selling costs, incurred to drive continued growth. I recommend GOOG shares to value oriented investors.
Abrams also invested in Arbitron (ARB). In the last earnings call, Arbitron reported Q1 earnings of $0.64 per share, $0.02 better than the Capital IQ Consensus Estimate of $0.62, while revenues rose 5.5% year/year to $106.4 million vs the $105.38 million consensus. I like the fact that the company reaffirmed guidance for FY12, forecasting EPS of $2.15-2.30, excluding non-recurring items, vs. $2.23 Capital IQ Consensus Estimate. Management highlighted in the earnings call:
Digital radio remains a key priority as we continue our work to follow radio onto its new digital platforms in order to quantify this growing audience segment thereby enabling customers to monetize it. Our cross platform initiatives continue to demonstrate the value that our unique personal, passive and portable measurement technologies can bring to this emerging marketplace.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.