By Guan Wang
Superstar fund manager David Tepper worked as the head trader on the high-yield desk at Goldman Sachs until he left to launch Appaloosa Management in 1993. Under Tepper's management, Appaloosa was up 132% in 2009 and returned 30% net of fees in 2010. In 2011, a year when many hedge funds reported sub-par performance, Tepper's fund was down about 5%.
So far, Tepper is on track to reverse last year's loss in 2012, at least based on the largest 10 positions in his 13F portfolio that is. Those 10 positions, assuming he has not changed anything since the end of 2011, have returned a weighted average of 22% so far this year, versus 10.4% for the S&P 500 index during the same period.
Table 1: Top 10 positions in Tepper's 13F portfolio as of December 31, 2011
C V R ENERGY
ROYAL BANK SCOTLAND GROUP
GOODYEAR TIRE & RUBR CO
DEAN FOODS CO NEW
BOSTON SCIENTIFIC CORP
SECTOR SPDR TRUST
CALUMET SPECIALTY PRODS
The best performing position in Tepper's portfolio is CVR Energy (CVI); coincidentally, it is also the largest. Tepper had $94 million invested in CVR at the end of last year. The stock has returned 60.6% since then, beating the market by over 50 percentage points. A few other hedge fund managers are also bullish about CVR. At the end of last year, there were 23 hedge funds that held CVR in their 13F portfolios, including Carl Icahn. He initiated a new $72 million position in CVR during the fourth quarter last year. Jim Simons' Renaissance Technologies is also a fan.
We like CVR. In January, Carl Icahn launched a tender offer to purchase CVR at $30 per share. It is very likely that CVR will become a private company and its shareholders will receive cash soon. In addition to the short-term value of the offer, CVR's long-term value is believed to be higher than $30 per share. We think the company's management team will be able to unlock some extra value over the long term. CVR is making good process in purchasing a refinery in Wynnewood, Oklahoma. The company is also actively growing its logistics business. Additionally, CVR has very low debt. Its debt-to-equity ratio is 0.75 and its net debt is only $500 million, which is expected to be completely paid off by 2013. After that, as a zero-debt company, CVR is expected to generate strong free cash flows. Like many other energy stocks, CVR is also trading at low multiples. Plus, even though it has already returned 60% in 2012, the company still boasts a low P/E ratio of 7.63. The company's earnings are expected to be stable going forward. Analysts estimate CVR will earn $3.67 per share in 2012 and $3.79 per share in 2013, down from $3.99 per share for the trailing 12-month.
Royal Bank Scotland Group Plc (RBS) also generated decent returns in 2012. The stock is up 20% so far this year, outperforming the market by 10 percentage points. As of the end of 2011, Tepper had $87 million in total invested in this position. Some other money managers also like this financial stock. As of December 31, 2011, there were 24 hedge funds with RBS positions in their 13F portfolios, including Tiger Cub Lee Ainslie's Maverick Capital, John Paulson's Paulson & Co and Jim Simons' Renaissance Technologies.
In 2009, RBS adopted a five-year strategic plan to lower its leverage ratio and loan-to-deposit ratio, reduce its non-core assets, and extend the maturities of its wholesale funding. RBS is making good progress on restructuring its balance sheet. The decreasing impairments will largely boost the company's earnings in the next few years. We also believe the company will be able to achieve sustainable growth over the long term. Analysts predict RBS will earn $0.69 per share in 2012 and $1.17 per share in 2013. Consequently its forward P/E ratio is 10.83 for 2012 and only 6.38 for 2013.
A few other positions in Tepper's portfolio with strong performance so far in 2012 include Apple Inc (AAPL), Calumet Specialty Products Partners LP (CLMT), and Macy's Inc (M). They all returned at least 20% so far this year. We have been recommending Apple to our readers for its cheap valuation and strong growth potential. Calumet also has very strong growth potential. Its earnings are expected to grow at 27% annually but it still has a relatively low forward P/E ratio of 13. The stock is also a good dividend play with a yield of 8.29%. Macy's also has attractive valuation levels. Its forward P/E ratio is about 11 and its earnings are expected to grow at 8% per year.