Appaloosa Management, L.P. is a Short Hills, N.J.-based hedge fund management firm founded by David A. Tepper. The firm manages over $4 billion in equities and has beaten the S&P 500 (SPY) consistently by a large margin.
I discussed David Tepper's Top Buys in a previous article. In addition, it is also interesting to have a look at the stocks where David Tepper is selling his holdings. In this article, I will be discussing four stocks where Appaloosa Management has significantly reduced its position.
Applied Materials Inc. (AMAT): My Take - Sell
Appaloosa sold 4,144,385 shares of Applied Materials last quarter completely exiting its position from the company. Applied Materials is a supplier of semiconductor and semiconductor-related fabrication equipment, providing nano manufacturing technology solutions to the global semiconductor, flat panel display, solar, and other industries. AMAT operates in four segments: Silicon, Fab Solutions, Display, and Energy and Environment Solutions.
Despite Applied Materials reporting a 1Q 2012 earnings beat, largely driven by foundry growth as with its semiconductor peers, there are few potential concerns going ahead. AMAT guided for market share loss in etch and CMP equipment due to flat capex growth by DRAM customers. Non semi conductor markets are expected to continue to remain weak. Its EES segment reported decline in its margins for 1Q and going ahead the company has guided for a 40% decline in revenues over previous quarter for this segment based on the order bookings. Its Display revenues were also weak for the quarter and going forward they are expected to decline by 25% q-q.
AMAT's 70% of revenues are derived from three customers. Based on the order book, it is expected to remain this way for 2H 2012. Such high customer concentration is another negative for AMAT. Overall the outlook for 2012 is mixed with strong foundry but weak non semi conductor segment. The earnings growth is expected to be slower than pure play semiconductor stocks and AMAT is likely to underperform relative to its pure play peers.
Goodyear Tire & Rubber Co. (GT): My Take - Sell
Appaloosa sold 4,904,918 shares of Goodyear Tire last quarter. It still holds 6,057,224 shares of the company. Goodyear Tire and Rubber Company is a leading manufacturer and distributor of tires and other products for original equipment manufacturers and the automotive aftermarket worldwide. Goodyear manufactures numerous lines of tires for use on automobiles, trucks, buses, motorcycles, aviation, and industrial equipment under leading brands Goodyear, Dunlop, Kelly, Fulda, Debica, Sava and other house brands.
Goodyear reported a big miss for 4Q 2011 with weakened performance across geographies. Revenue misses were much worse in its international markets due to China plant start up costs, Thailand disruptions and pension and foreign exchange headwinds.
1Q 2012 is expected to be another difficult quarter and Goodyear's 2012 outlook appears soft with weak replacement demand and difficult comparisons. The company is expecting to cut down production which might hamper its fixed cost absorption. In addition, costs associated with Thailand disruptions and Union City closures are expected to spill over into 1Q 2012. All these factors are expected to weight on its near term performance.
Macy's Inc. (M) - My Take: Buy
Appaloosa sold 2,543,740 shares of Macy's last quarter. It still holds 742,803 shares of the company. Macy's, Inc., operates department stores and Internet Web sites in the United States. The company's retail stores and Internet Web sites sell a range of merchandise, including men's, women's, and children's apparel and accessories, cosmetics, home furnishings, and other consumer goods. It also operates Bloomingdale's Outlet stores.
Macy's reported impressive 4Q 2011 results with sales up by 5% y-y. Importantly EBIT margins improved driven by SG&A leverage and credit improvement. Looking forward, the company management provided a conservative guidance for 2012 with 3.5% comparables growth and slightly better than expected EPS range. Given its management's track record of under-promising and over-delivering, I am positive that company can do better than its guidance.
Same store sales in 2012 are expected to be strong with the forthcoming roll out of site-to-store-to-door (290 stores by Fall 2012). Operational improvement initiatives by effective inventory management is expected to provide long term benefits including fewer out of stocks, increased turns and lower markdown expense. Further, as J.C. Penny (JCP) moves away from promotions, Macy's is in a favorable position for potential market share gains. Based on this opportunity for market share gain, fundamental improvement driven by strategic initiatives and share buybacks, I believe Macy's deserves a premium over its peers.
Valero Energy Corporation (VLO) - My Take: Buy
Appaloosa sold 4,650,467 shares of Valero last quarter. It still holds 908,161 shares of the company. Valero Energy Corporation operates as an independent petroleum refining and marketing company. It is the largest independent petroleum refining and marketing company in the world. The company operates through three segments: Refining, Retail, and Ethanol.
Last quarter was mixed for Valero with weak refining results offset by strong retail and ethanol performance driven by volumes. Looking ahead, the macro outlook is expected to get better with extra benefits from strong export environment. Further, with low natural gas prices, Valero has a cost advantage over its European peers. Hydrocracker projects at St. Charles and Port Arthur seem to be on schedule for a 2012 start. Following the completion of its capital projects in this year, Valero is expected to utilize its free cash flow for increasing shareholder returns in the form of dividends and share repurchases.