We recently compiled a list of the 10 Cheap and High-Quality Stocks Picked by Former SAC Capital Analyst. In this article, we are going to take a look at where Allison Transmission Holdings, Inc. (NYSE:ALSN) stands against the other cheap and high-quality stocks.
Jonathan Tepper, the chief investment officer of little-known hedge fund Prevatt Capital, has an interesting approach towards investing. Tepper, whose stock picks generally focus on quality and value of firms, believes that investors would be better served learning about the modern history of finance, as it relates to the rise and fall of big businesses as well as financial meltdowns, instead of being bogged down by economic theory based on mathematics that might not play out in the real world as it does in books. Tepper leads Prevatt Capital which had a 13F stock portfolio worth more than $296 million at the end of the first quarter of 2024.
Tepper is the author of The Myth of Capitalism, a book that dives deep into the public policy surrounding industrial concentration in the United States and the rise of powerful monopolies. Tepper, in a recent appearance on Capital Allocators with Ted Seides, a finance podcast, underlined that his investing thesis was based on his studies about powerful monopolies that were owned by investors he admired. Tepper noticed how a lot of these monopolies were businesses that, if they did not exist, somebody would have to invent them. He remarked that he thus learned to invest in firms that had a natural reason for existing.
His comments can be seen in action if we look at the latest financial disclosures of his hedge fund. More than 60% of the stock portfolio of Prevatt Capital is concentrated in the consumer goods and services sectors. Tepper has doubled down on many of his long bets, increasing stakes in four of the top ten stocks in the portfolio of Prevatt Capital during the first quarter of 2024. The total value of the 13F portfolio has increased by more than $25 million in the first three months of the year due to this buying activity, compared to the previous quarter. His top ten holdings comprise nearly 80% of the total portfolio.
There are several reasons why Tepper prefers the value-based long term investing approach of his mentors to create wealth, as opposed to the shorting strategy adopted by many other hedge fund managers on Wall Street. Some of the reasons include short squeezes, lots of hype around new firms, high borrowing costs, and several funds shorting the same firms. In contrast, a value-based approach creates wealth at a healthy pace and avoids permanent loss of capital or significant drawdowns. Buying quality firms also comes with the added benefit of strong cash flows, steady dividend payouts, and thoughtful share buybacks to increase value.
Our Methodology
For this article, we scanned the stock portfolio of Prevatt Capital according to the 13F filings submitted at the end of the first quarter of 2024. We selected the top 10 stocks from this portfolio. 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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A carpenter installing an aluminum die cast component in the engine of a commercial vehicle.
Allison Transmission Holdings, Inc. (NYSE:ALSN)
Number of Hedge Fund Holders: 31
Prevatt Capital’s Stake: $25,159,600
Allison Transmission Holdings, Inc. (NYSE:ALSN) makes and sells automatic transmissions for commercial and military vehicles. It comes in at third place on our list of top stock picks of Prevatt Capital. The bullish thesis around Allison Transmission Holdings, Inc. (NYSE:ALSN) centers on the leadership of the firm in the market of commercial vehicle transmission, a strategic focus on electrification, strong financial performance, and growth opportunities in international markets. Regulatory tailwinds can also provide a major boost to the firm in the coming years as more countries adopt EV-friendly policies.
The balance sheet of the company remains as strong as ever in a competitive market. Allison Transmission Holdings, Inc. (NYSE:ALSN) generates strong cash flows, in excess of $600 million per year, which in turn help the firm support reliable dividend payouts and share buybacks. The high operating margins of the firm, in excess of 30%, highlight the strong profitability of the stock. These margins also help paint the leadership of the company in a good light, shining on efficiencies that would otherwise be ignored. The dividend history of Allison Transmission Holdings, Inc. (NYSE:ALSN) is great reading for income-focused investors.
Overall ALSN ranks 3rd on our list of the cheap and high-quality stocks picked by former SAC Capital Analyst Jonathan Tepper. You can visit 10 Cheap and High-Quality Stocks Picked by Former SAC Capital Analyst to see the other cheap and high-quality stocks that are on hedge funds’ radar. While we acknowledge the potential of ALSN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ALSN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
