What Happened To $2.71 Billion In David Tepper's Portfolio?

by: Efsinvestment

David Tepper, one of my favorite hedge fund managers, is the manager of Appaloosa Management. He was able consistently outperform the market in the last decade. David Tepper earned his reputation as a hedge fund guru in 2009. His boldest move was snapping up the financial stocks when they were dumped by the rest of the investors. This bold move returned a whopping 130% in 2009, which was much better than the S&P 500 (NYSEARCA:SPY) return of 26% in the same period.

Since 2010, he has been unloading his banking shares, and looking for other opportunities. However, a recent market current hit me with a big surprise:

David Tepper's Appaloosa Management liquidates several of the financials of which he had been so bullish on. Today's 13F shows the fund - as of September 30 - completely exiting from Bank of America (BAC), Wells Fargo (WFC), Fifth Third (FITB), SunTrust (STI), MetLife (MET), and Hartford Financial (HIG).

Surely, there is a lot going on with financials these days. Bank of America lost 50% of its market cap in 2011. Wells Fargo, a Warren Buffett favorite, is also trading 25% below its 52-week high. Since January, Fifth Third, Suntrust, Metlife, and Hartford Financials lost 17%, 37%, 26%, and 32%, respectively.

However, I was not expecting him to dump these shares when they are trading near their bottom levels. Apparently, the hedge fund guru is not optimistic about another quantitative easing program. His fund is slashing the financials, after making significant returns in 2009, and 2010. What surprised me the most is the reduction in the total size of his portfolio.

In the previous 13F file, the total declared value was $4.24 billion. In the current 13F file, the total value of equities is declared to be $1.543 billion. That is a reduction of 64% in the portfolio’s equity portion. The question that comes to my mind is where is the money?

Obviously, the third quarter was a disastrous one for all equities. Financials, which constituted a significant portion of David Tepper’s portfolio took a deep hit. In the 2nd quarter, his largest holding was 7.2 million shares of Citibank (C). Between June and September, Citibank lost nearly 30% of its market cap. Tepper’s portfolio had 10 million Bank of America and 2.9 million Wells Fargo shares, at the end of 2nd quarter. Appaloosa Management also experienced big losses on its Bank of America and Wells Fargo holdings. Nevertheless, those three banks constituted only 13% of Tepper’s portfolio. Therefore, the losses in financial stocks are not sufficient enough to explain the mysterious $2.71 billion, that disappeared from the 3rd quarter 13F file. There must be another explanation.

In September, Institutional Investor, released an article, pointing out rumors that Tepper is somewhere near 30% - 40% cash. Apparently, the latest 13F filing supported that claim. Considering the losses experienced among equity markets in the third quarter, it is very likely that Tepper used the principle of stop-loss, and sold out holdings that were falling off the cliff.

Institutional Investor also suggested that he might have invested a significant portion of this cash in U.S. treasuries. Interestingly, the Federal Reserve announced “Operation Twist” on September. The idea was to sell short-term treasury bills and buy long-term bonds. Operation twist aimed to lower the long-term interest rates. According to Federal Reserve Bank of St. Louis, the interest rate on 10-year bills was 3.11 as of June first. By November 11, the interest rate was slashed by almost 50% to a historically low rate of 2.05%. Those invested in bonds made some real gains between June and November.

Although David Tepper sold out and/or reduced most of his holdings, he was pretty bullish on four stocks. Appaloosa management initiated new positions in E-Trade (ETFC), British Petroleum (BP), and Dana Holdings (DAN), while increasing its shares in Calumet Specialty Products (CLMT) by 264%.

Insiders are bullish on E-Trade, increasing their holdings by 12.55%. I think Tepper has seen extra value in this stock.

Dana Holdings, an automotive parts producer, is another company, insiders are bullish on. Insiders increased their holdings by almost 20% in the last 6 months.

Since the Gulf disaster, BP is trading way below its intrinsic value. It has a P/E ratio of 5.99, which is among the lowest in major integrated oil & gas companies.

Calumet is probably the most speculative pick among these buys. It has been bouncing between $17 - $22 ranges for a while. Insiders are extremely bullish on the company, increasing their holdings by 25% in the last 6 months. With a payout of 291%, the stock has a yield of 10%. It is another stock worth to watch for.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.