5 Big Buys by David Tepper
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David Tepper's Appaloosa Management is an employee-owned hedge fund that employs a fundamental analysis in its investments. The New Jersey-based firm invests in equity, fixed income, and hedging markets. Appaloosa Management had returned 30% in 2010. Tepper is known as the manager who can pull through failures and come back big. In 2011, his hedge fund has been awarded Institutional Hedge Fund Firm of the Year.
In the end of the third quarter, Appaloosa had over $4.019 billion in assets under management. Its portfolio is heavy on the financial sector (32.99%), technology (25.53%), consumer cyclical (12.97%), transportation (11.8%), and basic materials (6.31%). The popular hedge fund bought 7 new stocks, increased its stake in 23, and sold 10 out. The big buys were American International Group (NYSE: AIG), Ford Motor (NYSE: F), JPMorgan Chase (NYSE: JPM), MGM Resorts International (NYSE: MGM), and Hartford Financial Services Group (NYSE: HIG). As David Tepper is one of the top money managers, it is worthwhile analyzing his recent picks. In this article, I take a peek into these stocks and see whether they are worth buying or not. I briefly investigated these stocks from a fundamental perspective, emphasizing the recent developments in the company businesses.
American International Group
Tepper bought 8.250 million new shares of AIG in the latest quarter, making AIG one of his top stocks. It is the first time in at least 9 quarters the company appeared in the 13F Filing of the hedge fund.
American International Group is an insurance products and services company that operates in three divisions: Chartis, SunAmerica Financial Group, and Aircraft Leasing. The company had successfully completed an arrangement with China's PICC Group for an expansion of its life insurance business in the world's second-largest economy. It is noted that prior to this, AIG has already been dealing with the Chinese firm through one of its subsidiaries, the PICC Property and Casualty Company, where the former holds a 9.9% stake.
The joint venture AIG has entered into with China's fourth largest insurance firm is something that will get investors watching the stock more closely in the near future. Already, the stock leapt by 40% from a year ago. Despite the decline in earnings this year and the next, the long term prospects are encouraging, with an annual growth estimate of 14.73% in the next 5 years. The company, however, needs to show more action to get investors to believe it could recover from declining revenue in the past years. So far, the company is showing an impressive profit margin of 38.83%.
Mr. Tepper has been favoring Ford lately. He increased his position again, this time by 3.864 million. He also bought an additional 1.118 million shares in the previous quarter. The hedge fund initiated its stake in Ford earlier this year. Ford Motor Company is a developer, manufacturer, and distributor of vehicles and parts all over the world.
The company has recently announced a partnership it forged with GE for the latter to buy 2,000 units of Ford's C-Max Energi plug-in hybrids for converting half of its global fleet with alternative fuel vehicles. Ford has also urged China to embrace electric cars as a step to solve its worsening traffic congestion and air pollution. Automakers are optimistic over the demand for cars with their redesigning activities geared towards the midsize car segment. The stock has gained 5.11% from a year ago and continues to exhibit a robust performance. Its EPS has ballooned in the current year by almost three-fold. Growth estimates in the long term, however, are much lower than the current trend at 5.26%. On the other hand, Ford's profit margin of 13.36% is quite remarkable.
The hedge fund initiated a position in JPM that is equivalent to 2.41% of its total holdings. The last time JPM appeared on the 13F Filing of Appaloosa was when the latter sold all its shares, comprising 0.53% of its total portfolio. JPMorgan Chase & Co. is a financial holding company that provides a host of financial services worldwide. The company is currently facing a lawsuit for alleged turning its chief investment office into a secret hedge fund to generate profit for the bank. The lead plaintiffs for this complaint include the Arkansas Teacher Retirement System, the Ohio Public Employees Retirement System, and the state of Oregon.
So far, JPM's stock performance has been robust with a gain of 26.20% from a year ago. The earnings are expected to grow at an annual rate of 7.13% in the long term. With a net margin of 20.37%, the giant banking company is highly profitable. JP Morgan is also Appaloosa's top dividend stock, with a yield of 2.94%. It is a loyal payer of dividends for many years now and has shown its ability to raise such payments through a lower payout ratio of 25.19% compared to the historical level of 36.41%.
MGM Resorts International
The hedge fund tripled its stake in MGM in the third quarter, putting the share to the total portfolio to 1.84%. Appaloosa initiated its position only in the previous quarter. Prior to that, the company had not appeared in the 13F of the hedge fund within at least the previous 7 quarters. MGM is a Las Vegas-based operator of casino resorts. It offers gaming, convention, hotel, entertainment, and dining, among other amenities.
The company was recently reiterated a long-term "Neutral." The strength lies of its brand name, the progress it is making in its China business, and a solid pipeline for the convention business in the next couple of years. These, however, are partially offset by the weakening in the VIP business in Macau, a less lively domestic market, and the adverse impact of Superstorm Sandy. The stock, however, has been on a slump. It had already lost 5.47% from a year ago. Currently, the losses per share have gone down, but the company needs to show remarkable improvements in terms of revenues for it to generate positive earnings.
Hartford Financial Services Group
Tepper tripled his position in HIG in the latest quarter, bringing his company's total stake to over 3.6 million. This was equivalent to 1.75% of the hedge fund's total portfolio in the latest quarter. It is noted that the fund manager initiated his stake in the company earlier this year, but then sold a significant amount in the previous quarter.
The Hartford Financial Services Group is an insurance and financial services provider primarily in the United States and Japan. Its business segments are in Property & Casualty, Commercial, Group Benefits, Consumer Markets, Individual Annuity, Life Insurance, Retirement Plans, and Mutual Funds. While Appaloosa increased its stake in Hartford, Paulson has significantly cut his share count after the latter failed to decide for a spinoff that the hedge fund manager has been pushing. Paulson recommended that Hartford split between property-casualty and life insurance. The potential value of such move, Paulson noted, was underestimated by the company.
Earnings at HIG are estimated to grow in the next 5 years at 11.95% each year. The sales have been contracting in the past years, but the recent quarterly trend of 42.52% is quite promising. These recent gains have to be sustained to boost profits. Also, despite the dividend amount that is far less than those given during pre-financial crisis period, the company has been consistent in paying dividends. However, the payout ratio has gone up from a historical level of 11.58% to 36.16%, which suggests a relatively limited capability of the company to raise dividends. Meanwhile, the stock's year-to-date performance is up by 30.64%. However, it has lost 6.32% in the current month.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group, Ford, and JPMorgan Chase & Co. and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!