David Tepper founded Appaloosa Management in 1993. This hedge fund with $14.6 billion in assets under management invests in public equity and fixed income products, primarily of distressed companies. The fund also seeks investments in companies undergoing bankruptcy reorganization. The investment strategy of Appalloosa Management is event-driven. Tepper describes his investment philosophy with the phrase: "I am the animal at the head of the pack… I either get eaten, or I get the good grass."
Billionaire Tepper is known for producing some of the highest returns among hedge fund managers. Since its inception, his flagship hedge fund has netted 29.2% in annual compounded returns. In 2009, Tepper earned $4 billion, making him the highest paid hedge fund manager in the world. Tepper's bets have produced exceptional returns, so here is a glance at Tepper's 5 largest positions that yield more than the 10-year Treasury bonds.
Apple (AAPL) is the largest publicaly-traded company in the world, with a market capitalization of $546 billion. It is also the largest technology company by revenue and net income. The company sells a variety of consumer electronics, including computers and software. Its famous trademarks include iPhone, iPad, iPod, and Mac. Apple's product sales have grown spectacularly, and the company's earnings per share (EPS) are projected to surge an impressive 70% in 2012. The company represents a 10.13% stake in David Tepper's portfolio. This stake was boosted 277% in the first quarter of 2012 from the previous quarter.
Apple will initiate a quarterly dividend of $2.65 a share starting in its fiscal fourth quarter, which begins on July 1, 2012. At current prices, the annualized dividend will yield 1.9% on a payout ratio of 26%. Its competitors Microsoft (MSFT) and Hewlett-Packard (HPQ) pay dividends yielding 2.7% and 2.4%, respectively. Competitor Google (GOOG) does not pay any dividends. Apple seems to be fairly valued at the current price. The stock is changing hands at $587 a share. Guru investors David Einhorn, John Griffin, and Dan Loeb are also bullish about the company (see David Einhorn's stock picks).
Huntsman Corporation (HUN) is a $3 billion company that engages in the production and sale of differentiated chemicals. David Tepper's Appaloosa Management allocates a 1.77% portfolio share to this company. Huntsman Corporation has seen its EPS contract at an average rate of 5.2% per year over the past five years; however, expecting a rebound in housing and construction, analysts forecast a robust growth in EPS averaging 13.5% a year for the next five years. Citing large revenue exposure to a weak Europe (30% of Huntsman's sales are tied to Europe) and construction and household products (46% of overall sales), analysts at KeyBanc recently downgraded their rating on the company from buy to hold.
The company pays a dividend yield of 3.1% on a payout ratio of 28%. The company's peers Dow Chemical Company (DOW) and DuPont (DD) pay dividend yields of 3.9% and 3.4%, respectively. The stock seems to be undervalued relative to industry and the broad market. Currently, the stock is trading at $12.66 a share, up 27.2% year-to-date. Among fund managers, the stock is also popular with Andreas Halvorsen.
Valero Energy Corporation (VLO) is a $12 billion producer of transportation fuels and other petrochemical products. The company is the largest U.S. independent oil refiner. Valero Energy Corporation represents a 1.62% in the Appaloosa Management's portfolio. This stake was boosted by 181% in the first quarter of 2012 from the earlier quarter. The company generally operates on thin margins, but its refining infrastructure which is more advanced than that of its peers gives it an advantage. The company is estimated to grow its EPS at an average annual rate of 9.4% a year for the next five years.
Valero Energy Corporation pays a dividend yield of 2.7% on a payout ratio of 22%. Its competitor Tesoro (TSO) does not pay any dividends, while rival Sunoco (SUN) pays a yield of 1.7%. As regards the valuation, the stock is trading at a discount relative to its industry. At present, the stock is changing hands at $21.9 a share, slightly below the midpoint of its 52-week range. Billionaires Ray Dalio and T Boone Pickens are also great fans of the stock.
Masco Corporation (MAS) is a $5 billion company producing and selling building products and branded consumer products for the home improvement and construction markets. The company represents a 1.36% stake in the Appaloosa Management's portfolio. This stake was boosted by 2,755% in the first quarter of 2012 from the quarter earlier. Assuming that the company will benefit from the imminent recovery in the housing and non-residential construction markets in the United States, analysts forecast that Masco Corporation will boost its EPS at an average rate of 10% per year for the next five years.
Masco Corporation boasts a dividend yield of 2.2%. Its payout ratio is 120% of free cash flow. Unless there is a substantial improvement in EPS, the company's dividend will be unsustainable at the current level. The company's forward P/E of 21.6 is higher than its historical average. The stock is currently trading at $13.8 a share, up 26% year-to-date and close to its 52-week high. Hedge fund manager Joel Greenblatt sold out of his stake in the company in the quarter ended March 31.
Hartford Financial Services Group (HIG) is a $7.3 billion property and casualty insurance company and investment firm. It represents a 1.48% share of the Appaloosa Management's portfolio. Acting on the advice of billionaire John Paulson, the company has been successfully divesting its individual annuity, individual life, and retirement plan operations. Analysts expect it to boost its EPS at an average annual rate of 12.4% for the next five years.
The company pays a dividend yield of 2.4% on a payout ratio of 89%. Its rival American International Group (AIG) does not pay any dividends, while competitors MetLife (MET) and Allstate Corporation (ALL) pay dividend yields of 2.5% and 2.6%, respectively. The company's stock is currently overvalued; however, based on the forward earnings multiple it is trading on par with its own five-year average P/E. The stock is trading at $16.7 a share, about $2 above its 52-week low. Billionaire John Paulson and fund manager Andreas Halvorsen are bullish about the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.