3 Big Sells and 4 Big Buys by David Tepper

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 |  Includes: AAL, BAC, C, GT, M, UAL, WFC
by: Efsinvestment

David Tepper, the contrarian investor, is one of the most successful hedge fund managers on the Street. His company, Appaloosa Management, was able to beat the market with a large margin almost every single year in the last decade. He earned a reputation by snapping up banking stocks when their shares were trading at the very bottom. This bold move returned a whopping 130% in 2009.

Since then, Tepper has been steadily decreasing his bank holdings and looking for other opportunities. Naturally, his big sells are all large-cap banks. Big buys are diversified companies in cyclical businesses. The latest moves show that he is optimistic about the U.S. economy, especially airline companies. Here is a brief analysis of Tepper’s three latest big sells and four big buys.

Big Sells

Citigroup (C) offers financial products and services to governments, consumers, institutions, and corporations. With a market capitalization of $120.3 billion, Citigroup has a P/E ratio of 13.29, and a forward P/E ratio of 7.70. Although the company had a negative EPS growth during the last five years, earnings increased by 146.61% this year and analysts expect the company to have a 28.92% more next year.

Oppenheimer suggested an outperform rating for C, while Punk, Ziegel & Co, Deutsche Securities, and Ladenburg Thalmann recommend buying. The company's paid no dividend since Jan. 2009. Debt-to assets ratio has been going down since the last five quarters. Profit margin is 12.03%, while operating margin is 14.97%. Insider transactions increased by 31.52% over the last six months.

Tepper's made tremendous profits from Citibank’s strong recovery since 2009. However, Appaloosa Management decreased its Citigroup holdings by 34% in the last quarter. That might be another reason why the stock is down by 18% since January. The bearish momentum could continue for a while but I believe, sooner or later, Citigroup will claim its position as the king of banking in near future.

Bank of America (BAC): The North Carolina-based financial holding owns a $120.18 market capital and a 6.9 forward P/E ratio. Analysts estimate a 54.95% EPS growth for the next year and 13.95% for the next five years. P/B is 0.52 and P/C is 1.23, while P/FCF is 2.13. The company cut its dividends from 32¢ to 1¢ in Mar. 2009. Insider transaction increased by 133.86% during the last six months.

Appaloosa decreased its BAC shares by 31% in the last quarter. Analysts have an average price target of $17.5 for the intermediate term. BAC still has not recovered from its exposure to the sub-prime mortgage crisis. However, the company has a promising future, and can enter investment portfolios once the bearish sentiment is over.

Wells Fargo (WFC) largely avoided the sub-prime mortgage business and saved itself as a distant player in that risky area. Wells Fargo’s southern competitor Wachovia could not stand longer, and was forced to be taken over by Wells Fargo. The acquisition of Wachovia still has not born its fruits. However, in the long term, Wells Fargo will surely benefit from this cheap transaction.

Similar to its peers, WFC’s ytd return was a negative 7%. With a P/E ratio of 11.88 and forward P/E ratio of 8.31, Wells Fargo seems like a cheap stock. After all, the company has the strong backup of Warren Buffett, who owns 6.5% of the common shares. As long as Buffett owns a significant amount of shares, WFC will stay as the safest banking stock among the big three.

Big Buys

Goodyear Tire& Rubber (GT) beat Wall Street analysts, having a 26.51% profit this quarter, four times more than what analysts estimated. Owning a market capital of $4.29 billion, the Ohio-based company has a forward P/E ratio of 9, while earnings increased by 315.59% this quarter. Analysts estimate a 94.64% EPS growth for the next year and 26.35% for the next five years. P/S is 0.21, and P/C is 1.94. Deutsche Bank, Deutsche Securities, and Calyon Securities recommend buying GT shares.

Debt-to assets ratio strolls around 30%, but it is much better than that of 2006, as the ratio seems to have stabilized. In terms of forward P/E, PEG, P/S, P/C, and estimated EPS growth values, GT is a promising stock for the long run. In the last quarter, Tepper increased his GT shares by 51%. It is amazing to see how he was correct about the profitability of the company. Note that the stock is already up by 44% since January. It will be wiser to wait until a pullback occurs.

Macy’s (M) is one the largest discount department store chains in United States. Ohio-based Macy's has been in business for almost 200 years.

When we look at the stock, it is obviously undervalued with a current P/E ratio of 12.91 and forward P/E of 10.25. The market cap of $12.09 shows that there is still a lot of room left for growth. While the past five years have not been that good for shareholders, analysts estimate an EPS growth of 9.18% for the next five years. Tepper increased his Macy's holdings by 28% in the last quarter. Analysts have an average target price of $33. The stock is up by 16.4% in the last two weeks. I think the momentum will continue for a while.

United Continental Holdings (UAL) is also among Tepper’s bold buys. Appaloosa increased its UAL holdings by 48% in the last quarter. Janus Capital, Capital World, Vanguard, and Capital Growth are among the top 10 shareholders that significantly increased their UAL shares. United Continental is in a highly cyclical business where profits significantly depend on input prices. Although UAL hedges 40% of its fuel costs, changes in oil prices might affect the profits in a negative way. United CEO Jeff Smisek points out another issue: "We're taxed more heavily than alcohol, tobacco, and firearms. We're taxed as a sin."

Analysts estimate a tremendous EPS growth of 125% this year, driving the forward P/E ratio to a low value of 5.6. Insider transactions support analyst estimates, with an increase of 30% in the last six months. Although the ytd return is 10.71%, since April the stock is up by 25%. There is a 13% short float and 5.22 short ratio. It is one of the highly shorted stocks in the market. Given Tepper’s bold move, we might see a short squeeze in UAL shorts in the near future.

US Airways (LCC) is another airline company Tepper is extremely bullish about. Appaloosa Management increased its LCC holdings by 329% in the last quarter. Similar to UAL, US Airways is also in a highly cyclical business where profits depend on regulations as well as input costs.

Analysts estimate EPS will grow by 269% this year and 43.59% for the next one. That gives a forward ratio of 6.5 to U.S. Airways. Given the razor-thin net profit margins and increasing fuel costs, LCC is not a stock to hold for the long term. However, the low expected P/E ratio will surely attract investors in the medium term. Analysts’ average target price of $13 implies an upside potential of 30% in the near term. Once the stock breaks $10 resistance, it might go hyperbolic. It looks like almost all airline stocks could be good plays for the short term.

Disclosure: I am long C.