Lithia Motors, Inc. (LAD): Among Billionaire David Abrams' Stock Picks with Huge Upside Potential
We recently published a list of Billionaire David Abrams' 10 Stock Picks with Huge Upside Potential. In this article, we are going to take a look at where Lithia Motors, Inc. (NYSE:LAD) stands against other stock picks with huge upside potential.
David Abrams founded Abrams Capital Management in 1999. Before forming the Boston-based investment firm, Abrams worked at Seth Klarman's Baupost Group for 10 years. He graduated from the University of Pennsylvania with a BA degree in History, where he also served on the Board of Advisors of the College of Arts and Sciences. Abrams didn't have a finance background when he got his first job in New York in the early 1980s. He learned all about investing under Seth Klarman before setting out independently after a decade. He is a value investor, and in the ~12 years of his fund, he has achieved an annualized return of around 20%. His firm is like a one-man shop, which employs a small staff. Abrams Capital has 9 clients and discretionary assets under management (AUM) of $10.05 billion, as reported in the firm's Form ADV dated 13 January 2025. The last reported 13F filing for Q4 2024 included $6.22 billion in managed 13F securities and a top 10 holdings concentration of 98.7%.
Abrams is known for maintaining a low public profile, but in a conversation on Columbia Business School's 'Value Investing with Legends' Podcast series, he discussed the surface of his foundational principles when it comes to his investment philosophy. He starts by looking at the risks first and foremost, without any consideration of prospective gains. This is a reminder that the future remains unpredictable, which Abrams puts in the following words:
'When you look back, there's one path that happened, but that doesn't mean that going forward there's only one path. In the future, there's multiple paths.'
Abrams' portfolio reflects a balanced approach with exposure to growth sectors like Industrials and Consumer Cyclical, while also maintaining moderate allocations in established industries such as Communication Services. He also believes that declining industries can present stability because they attract limited new entrants. This also implies that high-growth sectors are, on the contrary, characterized by intense competition, which necessitates a more detailed analysis of potential competitive threats. Here's what Abrams had to say about this:
'If you have a shrinking industry and it's dying, it's like, people are not dying to get into that.'
Abrams serves as a director of several private companies. He is currently on the board of MITMCO, which manages the MIT endowment. Previously, he was a trustee of Berklee College of Music for 15 years, where he chaired the investment committee. He was also the trustee of Milton Academy.
To compile the list of billionaire David Abrams' 10 stock picks with huge upside potential, we sifted through Q4 2024 13F filings of Abrams Capital Management from Insider Monkey. From these filings, we checked each stock's upside potential from CNN and ranked the stocks in ascending order of this upside potential. We have also added Abrams Capital Management's stake in each stock as well as the broader hedge fund sentiment for it.
Note: All data was sourced on May 8.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A customer in a store, examining a new vehicle on the showroom floor.
Abrams Capital Management's Stake: $854.68 million
Number of Hedge Fund Holders: 45
Average Upside Potential as of May 8: 30.94%
Lithia Motors, Inc. (NYSE:LAD) is an automotive retailer in the US, the UK, and Canada. It operates in two segments: Vehicle Operations and Financing Operations. It sells its products and services through the Driveway and Greencars brand names through a physical location, e-commerce platforms, and finance & fleet management solutions.
The company's finance operations segment operates under DFC (Driveway Finance Corp) and delivered $12.5 million in income in Q1 2025. This was an improvement from a $1.7 million loss year-over-year. Following a full year of profitability in 2024, Lithia Motors, Inc. (NYSE:LAD) anticipates a consistent earnings trajectory for DFC in 2025.
During Q1, DFC originated $623 million in loans and marked a 24% sequential increase. This brought the total portfolio balance to over $4 billion. Lithia emphasizes that each loan originated by DFC contributes up to three times more profit than traditional indirect lending. Bank of America analyst John Murphy maintained his Buy rating on the stock, while increasing the price target from $410 to $460.
River Road Small-Mid Cap Value Fund highlighted the company's overall resiliency and stated the following regarding Lithia Motors, Inc. (NYSE:LAD) in its Q4 2024 investor letter:
'Another top contributor during the quarter was Lithia Motors, Inc. (NYSE:LAD) one of the largest global automotive retailers operating in North America and the United Kingdom. In late June, the auto industry was impacted by a cyberattack on CDK Global's dealership management system, which runs all back-office functions at Lithia as well as over 85% of all franchised dealers in the United States. In its Q2 2024 earnings release, LAD reported a -6.4% decline in same-store sales, driven primarily by a -4.7% decline in new vehicle units as LAD was not able to process sale transactions late in the quarter due to the CDK outage. Despite lower same-store sales, LAD outperformed expectations as its cost reduction initiatives and a shift in capital allocation resulted in sequential margin improvement and a lower share count. The company achieved its $150MM in annualized cost savings target ahead of schedule and now expects to double these savings by the end of 2024 through further inventory optimization and reductions. This will result in the all-important SG&A as a percentage gross profit declining to the mid-60s range and in line with LAD's long-term target. Acquisitions have added $27B in annualized revenues since 2020, ahead of LAD's goal of adding $25B in acquired revenues by 2025. Given the current high private market multiples for auto dealerships, LAD's management has shifted its capital allocation toward share repurchases, buying back 2.9% of the company in Q2. With low net leverage of 2.3x and year-to-date free cash flow of $740MM, we expect management to continue repurchasing shares aggressively. During the quarter, we added to the position prior to its Q2 results.'
Overall, LAD ranks 6th on our list of billionaire David Abrams' stock picks with huge upside potential. While we acknowledge the potential of LAD as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter time frame. There is an AI stock that went up since the beginning of 2025, while popular AI stocks lost around 25%. If you are looking for an AI stock that is more promising than LAD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.
Disclosure: None. This article is originally published at Insider Monkey.
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