By Guan Wang
David Tepper received his Masters degree in 1982 from Carnegie Mellon University, whose business school was later named after the fund manager He went on to join Goldman Sachs, which he left in 1993 to found Appaloosa Management. The fund manager earned $4 billion in 2009, making Tepper the highest paid hedge fund manager that year. According to Katrina Dean Allen's "Absolute Return Billion Dollar Club," Appaloosa grew from $5 billion in assets under management to $12 billion in 2009. In 2010, Appaloosa again generated a strong return of 30%. The company's performance last year was in line with the average hedge funds, losing around 5%, but it seems that Tepper has been recovering this year. In a previous article, we found that Tepper's top 10 positions as of December 31, 2011 had returned 22%.
In mid-May, Tepper released the 13F holdings of Appaloosa Management as of March 31, 2012. Let's take a closer look at his latest bullish bets.
Apple Inc (AAPL) was the largest non-ETF position in Tepper's Q1 13F portfolio. During the first quarter of 2012, Tepper significantly boosted his stake in Apple by 277%. By the end of March, Appaloosa had $410 million invested in this stock. Hedge funds have shown great interest in Apple. Over one-third of the 350-plus hedge funds we track had Apple in their portfolios at the end of March (check out the list of hedge funds with Apple positions). We have been recommending investors add Apple to their portfolios. It is currently trading at only 14X its 2011 earnings, while its expected earnings growth rate is above 20%.
A few other tech giants are also trading at attractive valuation levels. For example, another large position in Tepper's portfolio, Google Inc (GOOG), has a current P/E ratio of 18.6 and is expected to grow at 18%. Google is a new position in Tepper's portfolio. Tepper sold out of his stakes in Google during the fourth quarter last year, but he initiated a brand new $104 million of Google over the first quarter this year. Similar to Apple, Google is also very popular among hedge funds. Over 100 hedge funds reported Google in their 13F portfolios. Stephen Mandel, Andreas Halvorsen, Chase Coleman, Jim Simons and Ken Fisher each owned stakes in Google at the end of March (check out Jim Simons' top stock picks).
Over the first quarter, Tepper also largely increased his bets on United Continental Holdings Inc (UAL). He raised his stakes in the company by 571% to $171 million. United Continental was also quite popular among hedge funds. As of March 31, 2012, there were 30 hedge funds with United Continental stock in their 13F portfolios. Bill Miller's Legg Mason Capital Management had nearly $135 million invested in United Continental at the end of the first quarter. John Griffin, Leon Cooperman and Ken Heebner are also bullish about this stock.
At the beginning of 2012, United Continental said it expected both leisure and business travel booking to continue their strong growing trends. In addition to higher volumes, prices are also expected to be elevated as the airline industry overall has been cutting its capacity over the past couple years. As a result, United Continental's revenues are expected to grow by about 8% in 2012, following a rise of 9% in 2011. The volatility of oil prices is a major risk of investing in airlines companies - the company's fuel expense increased 29% in 2011 due to the higher prices.
However, we think United Continental's margins will be improving as we expect its expense will be rising at a slower pace compared with its revenues. In 2012, the company is expected to achieve $200 million in cost synergies through its "Continental integration" program. United Continental has attractive valuation levels as well. It is expected to earn $3.80 per share in 2012 and $5.42 per share in 2013. It is currently trading at around $22 per share, or 4X its 2013 earnings, versus the industry average of 12.
Tepper also invested $223 million in Citigroup Inc (C) and another $173 million in Royal Bank Scotland Group Plc (RBS). Financial stocks might be a bit risky to invest in, but their stock prices have incorporated the relatively high risks. For example, Citigroup is expected to earn $4.06 per share in 2012 and $4.73 per share in 2013, meaning its P/E ratio for 2013 is only 6. RBS has experienced some EPS deterioration over the past year but analysts expect such trend to reverse in the future. The S&P estimates the company's EPS to be $0.69 in 2012 and $1.17 in 2013, so its 2013 P/E ratio is also only 6. Lee Ainslie was also bullish about both Citigroup and RBS. His Maverick Capital had $63 million invested in RBS and another $202 million invested in Citigroup at the end of March (see Lee Ainslie's top stock picks).