Earlier this week, David Tepper's Appaloosa Management filed a Form 13F detailing the fund's long holdings as of June 30, 2011. Here is a quick summary of major changes to the fund's portfolio, including new positions as well as increased positions and notable holdings. While we think investors have a lot to gain by following the investment decisions of successful funds, we caution market watchers against blindly mimicking their portfolios.
Mosaic Co (MOS)
The Minnesota based company produces phosphate and potash based fertilizers for the agriculture industry. The stock trades at a trailing P/E of 11.47 and a price/sales of 2.67 despite offering secular global growth opportunities as well as 25% profit margins. At the time of their report, Appaloosa owned 2,390,027 shares. Based on the current market price, the position is worth $154,061,140.
Despite strength in the agriculture industry, the stock has been pressured because of a transition from Cargill ownership. In late May, Cargill distributed about 178 million MOS shares to Cargill shareholders and exchanged about 108 million shares with Cargill debt holders. This transaction almost certainly put pressure on the stock price, but these structural factors should be used as buying opportunities. Investors would be wise to take a closer look at this company. While some investors prefer Potash of Saskatchewan because of their concentrated exposure to Potash, MOS is very much a play on the industry.
Western Refining (WNR)
At the end of last quarter, Appaloosa had 2,798,374 shares. This is currently a strong period for the industry. In the quarter ending June 30, 2011 sales increased from $2.145 million to $2.557 million year over year. This was especially beneficial for shareholders because cost of products sold grew at a slower pace and direct operating expenses are relatively stable.
Analysts expect the company to rapidly grow earnings in the coming year. The stock trades at a trailing P/E of 58.62 and a forward P/E of 5.99. The stock appears cheap, but investors need to have a strong sense of where we are in the economic cycle. In addition, investors should pay close attention to the company's high debt levels because the refinery business is dependent on low margins and rapid industry pricing changes can have outsized effects on the stock.
Google Inc (GOOG)
At the end of last quarter, Appaloosa had 90,000 shares. Appaloosa does not necessarily shy away from technology stocks, but they do seem to have a preference for old economy stocks. Still, based on Google's dominant market position and low valuation it is not a surprising holding. The stock trades at a trailing P/E of 20.28, a forward P/E of 13.40 and a PEG ratio of 0.86. Excluding the roughly $40 billion of excess cash on the balance sheet, the trailing P/E is 15.8 and the forward P/E is 10.44.
Valero Energy Corp (VLO)
At the end of last quarter, Appaloosa had 7,762,004 shares. This was a 5,197,114 share increase from the previous quarter. This position is very much in line with David Tepper's apparent bullishness for refining stocks. The company trades at low valuations. They have a trailing P/E of 17.19, a forward P/E of 5.18 and a PEG ratio of 1.00. In the quarter ending June 30, 2011 revenues increased from $20.56 million to $31.29 million in the last year. Unlike Western Refining, VLO's expenses grew at a similar rate to revenues. Valero is the industry leader in this space and their fortunes are closely tied to the industry so investors who are bullish of refining should take a close look at this company.
Citigroup Inc (C)
The money center bank was Appaloosa's largest position at the end of the last quarter. Appaloosa had 7,201,841 shares. More recently, the stock price has crumpled under the pressure of the broad market sell-off. For now, financial headlines seem to focus on Bank of America but the truth is that Citigroup is facing similar levels of downward pressure.
Based strictly on the numbers, the company is absurdly cheap. The stock has a trailing P/E of 9.36, a forward P/E of 5.80 an a PEG ratio of 0.60. In the absence of dilutive capital raises, the bank is cheap based on their normalized earnings potential. With $1.956 trillion total assets, even a 1% return on assets will yield $19.5 billion. With this in mind, Citigroup could conceivably trade much higher over the long term.
Bank of America (BAC)
At the end of last quarter, Appaloosa had 14,495,002 shares.
Like Citigroup Inc (C) and other money center banks like Wells Fargo (WFC) and JPMorgan Chase (JPM) these banks will someday trade at much high valuation ratios so long as they maintain solvency in the short term. Based on total assets, BAC is the country's largest bank. With $2.261 trillion in assets, the company's normalized earnings based on a 1% return on assets are $22.6 billion.
The mortgage put-back liabilities are a real concern, but investors simply concerned about dilution from stock issuance would be wise to take a closer look at the bank's preferred and trust preferred stock.