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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.

As of the 2011 second quarter, Appaloosa had a diversified portfolio of equities. Tepper was selling the financial stocks for a while, but they still constitute 20.38% of his holdings. Financials are followed by technology (17.8%) and energy (15.3%) companies. According to Edgar Online, he made significant transactions in the last quarter. I have examined these transactions from a fundamental perspective, adding my O-Metrix Grading System where possible. Data obtained from Finviz/Morningstar and is current as of Aug.17.

Big Sells

Company Name

Ticker

Shares Held

% Change

% of Portfolio

O-Metrix Score

Hewlett Packard

HPQ

2.8 million

-54.77%

2.61%

7.5

Bank of America

BAC

10 million

-41.91%

2.07%

N/A

Dean Foods

DF

9.4 million

-31.11%

2.23%

N/A

Microsoft

MSFT

3.9 million

-17.52%

2.79%

7.5

Big Buys

Mosaic

MOS

2.4 million

NEW!!!

4.37%

4.2

CVR Energy

CVI

7.3 million

371%

5.11%

10.5

Valero Energy

VLO

7.7 million

202%

4.54%

6.5

Big Sells

Hewlett Packard is one of the largest technology companies in the world, providing hardware and software to individual customers, enterprises, and the government sectors. Appaloosa Management owns 2.8 million shares, but Tepper reduced his holdings by almost 55% in the last quarter. While the company is doing well, the stock has been going south for a while. Since its peak of $48 in mid-March, the share is down to $32. The year-to-date return is -25%. With a low P/E ratio of 7.69 and forward P/E ratio of 5.88, the stock is very cheap. The company offers 1.53% yield and analysts estimate an EPS growth of 8.73% for the next five years. Based on these parameters, Hewlett Packard has an O-Metrix score of 7.5, which is well above the market. I am not sure why Tepper is selling his shares, but I think it is a good stock for the long-term.

North Carolina-headquartered Bank of America is one of the largest financial companies in the U.S. Appaloosa Management owns 10 million shares but reduced its holdings by 42% in the last quarter. Tepper made this transaction at a price range of $11-14. Considering the last close price $7.46, it was a highly profitable transaction. While the company has a low price-to-book-value of 0.34, Bank of America has one of the most inflated balance sheets in the finance world. The expectations are extremely high for the next year’s earnings, but Bank of America reported losses of $16 billion in the last 12 months. The stock lost 50% since March. I would not recommend buying Bank of America, but it is too late to sell it.

Texas-based Dean Foods is a dairy producer, operating in two segments, fresh dairy direct and Whitewave. Appaloosa Management owns 9.4 million shares but reduced its holdings by 31.11% in the last quarter. Tepper made this transaction at a price range of $10-14. The last closing price of $8.6 is much cheaper than what he paid for. Dean reported a loss of $26.22 million for the last 12 months. The company is trading at a low price-to-book value of 1.05. The stock has a low Beta of 0.8 and a low average true range of 0.43. Analysts have a target price of $11.8, implying an upside potential of 35%. However, the forward P/E expectation of 9.87 seems too optimistic to me. I would rather wait until earnings confirm the expectations.

Microsoft, the software giant, is one of the cheapest stocks in the market. Appaloosa Management owns 3.9 million Microsoft shares, but reduced its holdings by 17.5% in the last quarter. Tepper made this transaction at $24-26 range. As of August 17, Microsoft was trading with a low P/E ratio of 9.35 and a lower forward P/E ratio of 8. The company offers a yield of 2.54%, and has a low PEG ratio of 0.9. Analysts estimate an annualized EPS growth of 10.53% for the next five years, which is conservative given the 17.63% annualized EPS growth in the last five years. Based on these parameters, Microsoft has an O-Metrix score of 7.5. My FED+ fair value estimate range for Microsoft is $40-46. At some point, sooner or later, the stock will catch up with the company. (Full analysis here.)

Big Buys

Mosaic is a large-scale diversified agricultural company, specializing in production and marketing of fertilizers worldwide. Tepper opened a new stake in the company, acquiring 2.4 million shares. He currently invested 4.37% of his portfolio in Mosaic Company. As of Aug. 17, Mosaic had a market cap of $30 billion. The stock is trading with a low P/E ratio of 11.92 and a lower forward P/E ratio of 10.69. Dividend yield is 0.3%. Analysts estimate an annualized EPS growth of 9% for the next five years. The mean target price is $83.3, implying 24% upside potential. The company has a mediocre O-Metrix score of 4.2. However, Mosaic is one of the best stocks for those seeking exposure to increasing agricultural commodity prices.

Texas-based CVR Energy refines, transports and markets fuels in the U.S. The company also operates nitrogen fertilizer plants. Tepper is pretty bullish on CVR Energy, increasing his holdings by 371% in the last quarter. He currently owns 7.3 million shares and invested 5.11% of his portfolio in the company. CVR Energy has a market cap of $2.2 billion. The stock is pretty cheap, with a P/E ratio of 11.33 and a forward P/E ratio of 7.64. Analysts estimate an annualized EPS growth of 20% for the next five years, which is possible considering the 16% EPS growth of the past five years. The stock returned a stunning 67% since January with a one-year return of 226%. The company has an A+ O-Metrix score of 10.5. If analysts’ EPS growth estimates hold, the stock will be an outperformer in the long-term. Based on the fundamentals, Tepper’s bullishness is well-justified.

Valero Energy, another Texas-based energy company, operates as an independent petroleum refining and marketing company. Tepper is also bullish on Valero, increasing his holdings by 202% in the last quarter. He owns 7.7 million shares and invested 4.54% of the portfolio in Valero. As of Aug. 17, Valero had a market cap of $12 billion. The stock is trading at a P/E ratio of 9 and a low forward P/E ratio of 5.1. The company offers a yield of 0.95%. Analysts estimate an annualized EPS growth of 8% for the next five years. Based on these parameters, Valero has an O-Metrix score of 6.5. Unlike CVR, Valero was a disappointment for the shareholders. The year to date return is -9%. Tepper made his transaction at a range of $26-$30. Current price of $21 is much lower than what Tepper paid for.

Source: 4 Big Sells and 3 Big Buys by David Tepper