By Matt Doiron
Appaloosa Management, managed by David Tepper, has about $16 billion in assets under management. Tepper himself is a billionaire, in part due to very strong returns in 2009, and in recent media appearances has been very bullish in the market. We follow hedge funds because our research has shown that they have demonstrated considerable stock picking ability. For example imitating hedge funds' most popular large cap stocks yielded an excess return of 2 percentage points per year and imitating hedge funds' most popular small-cap stocks outperformed the S&P 500 index by 18 percentage points per year over a 10 year period (see the details here). Appaloosa is one of the hedge funds that we give a lot of attention. We have gone through Appaloosa's most recent 13F filing, which discloses many of its long equity holdings as of the end of December, to look for stocks that Tepper likes and that investors might find to be good values after further consideration. Read on for our thoughts on the five largest single-stock positions in Appaloosa's 13F portfolio and compare them to previous filings.
While a number of other hedge funds were selling Apple Inc. (AAPL) during the fourth quarter in 2012 (in fact it lost its place as the most popular stock among hedge funds to AIG), Tepper actually increased his stake by 75% to a little over 910,000 shares. The bearish take on Apple is that its shrinking margins will offset the growing tablet and smartphone markets. Tepper and other bulls are likely eyeing the trailing P/E of 10 and hoping that the company can at least keep its earnings steady. Wall Street analysts actually predict strong growth, leading to a five-year PEG ratio of 0.5.
Another popular stock that Appaloosa owned at the beginning of 2013 was Citigroup Inc. (C). Citi is another potential value play: the stock is priced at a discount to book value, with a P/B ratio of 0.7, and at 9 times expected earnings for 2014. In terms of book value Citi is cheaper than peers JPMorgan Chase and Wells Fargo, but more expensive than Bank of America. Revenue was up slightly last quarter compared to the fourth quarter of 2011, which allowed earnings to come in 25% higher. Billionaire George Soros was buying Citibank in the fourth quarter of 2012.
Tepper and his team reported owning 6.1 million shares of American International Group, Inc. (AIG), which as we noted earlier became the new top stock among hedge funds last quarter. AIG's P/B ratio is 0.6, making it another beaten-down financial currently trading much lower than book value. We think that even allowing for some skepticism about the company's assets a P/B of 0.7 or 0.8 would be more appropriate, implying a significant upside to the stock price. The stock is up 40% in the last year, beating the S&P 500, and we think that as time passes it should become more acceptable for large institutions to own.
Nobody told Tepper that you're not supposed to invest in airlines: Appaloosa owned 9.1 million shares of United Continental Holdings Inc (UAL) at the end of the fourth quarter of 2012. US Airways - another of the fund's top ten picks - is merging with bankrupt American Airlines and in theory industry consolidation should lead to higher prices. United Continental trades at 5 times consensus earnings for 2014, and the five-year PEG ratio is 0.5. We agree with Tepper that many airlines look cheap right now, and would be interested in comparing United Continental to its peers including US Airways and Delta.
The Goodyear Tire & Rubber Company (GT) rounded out Appaloosa's top five picks with the hedge fund disclosing a position of over 14 million shares in the filing. Goodyear experienced an 11% decline in revenue in the fourth quarter of 2012 compared to the same period in the previous year, and is highly levered both through debt and through pension obligations. Between that and its exposure to rubber demand, it carries a beta of 2.1. However, Wall Street analysts are very optimistic about Goodyear's prospects: the forward P/E is only 5 and the PEG ratio is very low as well. With the company's recent troubles we would be more likely to look at other auto related companies.