Billionaire Tepper's Top Long-Term Small-Cap Picks

Includes: AAL, FIO, GT, HUN, OC
by: Insider Monkey

By Eric Winter

Combining different sets of data and probabilities is a great way to come up with market-beating investing strategies, and it's also a great way for the retail investor to hone in on specialized information gleaned from hedge fund holdings. Different parameters such as earnings trends, insider purchases, holding terms, etc., can be compounded to find stocks that have extra appeal in one's portfolio. We have performed our own studies and have constructed a small-cap strategy that has returned 37% between September 2012, and March 2013, versus 12.9% for the S&P 500 (read more about it here). Keeping these different filters and screens in mind, here are five small-cap stocks that received large allocations from billionaire David Tepper and have remained in his portfolio for a year or longer.

The Goodyear Tire & Rubber Company (NYSE:GT) is at the forefront of our list and acts as Tepper's largest small-cap holding that has had a year-long (or greater) presence in his fund, Appaloosa Management. Registering in with a market cap that is under $3bn, GT's small size didn't stop Tepper from allocating over 4% of his fund's $4.6bn to it. The tire manufacturer has seen some red days in the past month as rising rubber prices and looming increases in rubber duties weigh negatively on its bottom line. Zach's recently downgraded GT to Underperform on the seventeenth of this month. Billionaire Daniel S. Och of OZ Management carries over 1.2mm shares of the stock (check out his portfolio's make-up here).

US Airways Group. Inc. (LCC) comes in second with a market cap of $2.5bn and a 3.53% portfolio allocation by Tepper. LCC's upcoming merger with American Airlines could create earning profits of $2.6bn for the merged company analysts say, although transition and integration costs could exceed $1.2bn over the next three years. Tepper increased his position in LCC by 13% in 2012, while the stock's triple-digit gains in that time period substantially increased its market value. Billionaire George Soros of Soros Fund Management has a $53mm investment in the airline (view his top five stocks here).

Huntsman Corp. (NYSE:HUN) is a $4.3bn chemical products manufacturer that occupies a 2.5% position in Appaloosa's portfolio as of the end of last year. Similar to LCC, Tepper pushed up his share size in HUN from the start of 2012 to the end (to the tune of 44%), but the stock's 56% gain (and 2.8% dividend yield) parabolically increased the position's market value. HUN was described at the start of this month by Monness Crespi as trading at one of the least expensive valuations, prompting the firm to upgrade the stock to Buy. Twenty-nine of the 400+ funds we track hold HUN in their portfolios. Billionaire Andreas Halvorsen of Viking Global initiated a 1.3mm share position in Q4 2012.

Owens Corning (NYSE:OC) makes the list with a market cap of $4.7bn and a 2% portfolio commitment from Appaloosa. OC struggled through each earnings season in 2012, generating miss after miss. However, the stock price seemed to shrug the poor numbers off and garnered investors who bought in this time last year with a gain matching the S&P 500's. Late last month, OC announced a strategic alliance with BASF and TenCate Advanced Composites to deliver lighter-weight solutions in automobile parts manufacturing. Billionaire Israel Englander of Millennium Management carries a call position in OC valued north of $10mm.

Fusion-IO, Inc. (NYSE:FIO) is the last stock that made our screen, possessing a market capitalization of $1.5bn and an investment from Tepper amounting to $32mm. For the most part, Appaloosa kept its share size in the enterprise technology company roughly steady in 2012 (with a slight bump going from Q1 to Q2); however, the stock's rocky performance and negative annual return of 9% kept the position's market value from gaining any sizable traction. FIO has continued to suffer in 2013, returning -37% year-to-date. Stifel Nicolaus upgraded the stock to Buy last week, recognizing that competition in FIO's sector is imminent but the market can support multiple vendors. Billionaire Noam Gottesman of GLG Partners has almost $10mm invested in FIO.

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

Business relationship disclosure: This article is written by Insider Monkey's writer, Eric Winter, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.