Billionaire David Tepper Is Bullish On These High Beta Stocks
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In a recent interview on CNBC, David Tepper, who runs hedge fund Appaloosa Management, came off as very bullish on the U.S. stock market. The billionaire argued that the economy is improving, that equities tend to have low valuations at the moment, and that monetary policy will fuel a strong recovery in areas such as housing and autos. We noticed that at the end of the third quarter Appaloosa has owned a number of stocks with high beta statistics, meaning that they tend to move up or down more than the market index in response to developments (check out Tepper's stock picks). We went through Tepper’s 20 largest stock positions by market value in Appaloosa’s most recent 13F filing, and here are the five stocks with the highest beta, all of which the fund had at least $70 million invested in:
Tepper and his investment team increased their holdings of MGM Resorts (NYSE: MGM) to 6.9 million shares. Because of its high debt load- particularly in combination with being unprofitable- and the nature of the casino business, MGM’s beta is 2.3 indicating that it reacts very strongly to movements in the market. In addition, revenue was about flat last quarter compared to the third quarter of 2011. Fellow billionaire John Paulson had reported almost 38 million shares in its portfolio (find John Paulson's favorite stocks). It’ll be interesting to see what happens at the company if the economy does see strong growth, but for now we wouldn’t buy the stock.
Chemical company Huntsman Corporation (NYSE: HUN), with a beta of 2.2, was another of Appaloosa’s bullish-on-the-economy stock picks. Huntsman trades at 8 times earnings, on both a trailing and a forward basis, despite the stock’s 72% rise in the last year. However, sales were down in the third quarter versus a year earlier. John Burbank’s Passport Capital owned 11 million shares of Huntsman, making it that fund’s second largest 13F holding. Its valuation is attractive, including against other chemical companies, and it might be worthy of further research.
The Goodyear Tire & Rubber Company (NASDAQ: GT), because of its ties to auto demand, its high debt yield, and large pension obligations, has a beta of 2.1 but Tepper had bought shares between July and Septemberto finish the quarter with a position of 14 million shares. Billionaire Steve Cohen’s SAC Capital Advisors also liked Goodyear, reporting a position of 5.7 million shares (research more stocks Cohen liked). While revenue and earnings have been down, Wall Street analysts are very optimistic: their earnings estimates imply a forward P/E of 6 and a five-year PEG ratio of 0.2. It sounds appealing but we would be cautious of the company’s risks.
$9.6 billion market cap property and casualty insurer Hartford Financial Services (NYSE: HIG) was another stock highly exposed to the broader economy, carrying a beta of 2. The fund owned 3.6 million shares at the end of September after having more than tripled the size of its position in the previous three months. Citadel Investment Group, managed by billionaire Ken Griffin, also added shares. The market seems less bullish on the company: 11% of the outstanding shares are held short. However, with a low P/B ratio (0.4) and a low forward P/E (7) it’s worth considering on value terms.
During the third quarter Tepper initiated a position of 8.3 million shares in American International Group (NYSE: AIG), making it one of the five largest positions in his 13F portfolio. AIG had made our list of the most popular stocks among hedge funds for the quarter (see what the ten most popular stocks were). The stock has a beta of 2. The insurer looks like a good value play to us, as it trades at half the book value of its equity- our view is that it should trade at a discount, but a smaller one than that- and 10 times consensus earnings for 2013.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group. 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!