Take the Plunge and ‘Tepperize’ Your Portfolio for 2013

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's no secret that Apple (NASDAQ: AAPL) is one of the most popular stocks in the hedge fund industry. Of the 400 mega-funds we track, 147 were long Apple at the end of last quarter, and in terms of shares held, the total size of their holdings increased by 7%. Whether we're looking at the number of funds long or the quantity of capital invested, Apple trumps all other U.S. equities. Numero uno.

Now that that's off of our chest, we'd like to take a look at what one prominent Apple bull had to say on CNBC recently, David Tepper of Appaloosa Management (here's the hedge fund's top stock picks). Appaloosa manages close to $16 billion in assets, and has returned 35% this year, according to the network.

Tepper was on its "Squawk Box" segment, and while he discussed a range of topics, he focused on the state of the American economy, specifically on the belief that the Fed's monetary stimulus gives equities "a lot" of upside, with "very limited downside." In the hedge fund manager's opinion, investors would be best served by riding with the Fed - not against it - mentioning that "they're going to keep on doing this until the unemployment rate goes down."

At a tick under 8%, unemployment is high enough that we can reasonably expect continued stimulus through at least the next year, Tepper argued, adding that those worried about inflation are still best served by investing in the equity markets. Now, one obvious headwind discussed is the creeping fiscal cliff and negotiations in Washington, but on the subject, Tepper said he was "cheerful to know that they're talking about not having another deadline in two months," which would likely signal that a long-term deal was in the works.

While he didn't mention any specific equity plays, our records allow us to look at what Tepper was bullish on last quarter, likely giving us a good gauge on some individual out-performers that investors can consider buying if they wish to "Tepperize" their portfolios for 2013.

"Tepperize" your portfolio.

Interestingly, Apple holds the top spot in Appaloosa Management's stock portfolio, good for nearly 9% of the fund's total 13F assets. Over the past four quarters of 13F filings, Tepper has upped his stake in Apple by nearly 13-fold, and added a modest 1% to his holdings in Q3.

In Apple, it's likely that Tepper sees the same undervaluation story that most bulls are harping on, and at 9 times forward earnings and 11 times free cash, it's hard to miss. The sell-side expects Apple to grow its EPS by nearly 20% a year through 2017, which is above-average, and with a dividend yield near 2%, we'd rather have the growth prospects of an industry-leading tech giant over a 10-year Treasury, which has a similar yield.

Now, most value investors who have bought in over the past few months are likely kicking themselves due to Apple's moderate selloff, but we believe that the growth catalysts are there to boost shares back to a fairer valuation.

In no particular order, here are some potential events that Cupertino bulls can be looking forward to in 2013: (1) a deal with mega-carrier China Mobile, (2) the release of an Apple TV, (3) a spectrum boost from Congress (given to partner mobile carriers), (4) a low-cost iPhone for emerging markets, and on the quantitative side of things,(5) a dividend hike, or (6) a FY2013 Q1 earnings blowout.

There's no way to know if some - or any - of these events will come to fruition, but it's important to note that point No. 2 may be the most important in the short run, as some analysts expect an 'iTV' to add $4-$5 onto Apple EPS next year (see Apple TV Could Add $4.50 to EPS: Analyst). With growth at a very reasonable price, there's not much wrong with Apple, and even the technical analysts are finally giving their support as well (see Technical Analyst is Bullish on Apple).

Moving on to some of David Tepper's other picks, we can see that Citigroup (NYSE: C)American International Group (NYSE: AIG)United Continental Holdings (NYSE: UAL), and Goodyear Tire & Rubber (NASDAQ: GT) hold spots 2-5 in Appaloosa's 13F portfolio, and for good reason: each stock's future earnings stream is being undervalued at the moment.

Looking at Citigroup specifically, we can see a big bank that has a huge edge in growth, particularly because of its focus on emerging markets, while most of its peers concentrate on operations in American soil. While the bank doesn't break down its revenues by specific countries, various sources note that around 40% of its top line comes from outside of the U.S., and in transitional markets, GDP expansion of 4-5% over the next year is widely forecasted.

With essentially industry-average net margins, this translates into above-average EPS growth, which the Street expects to fall between 11-12% a year over the next half-decade. This consensus is far superior to what's expected of closest peer JP Morgan Chase (7-8%), and despite this obvious advantage, Citigroup's forward earnings trade at a nearly identical multiple (8.4X) to that of JPM.

Turning to AIG and United Continental Holdings, both companies have seen near-term headwinds recently. AIG shares were forced to undergo uncertainty over the U.S. government's stake in the company, but those worries have since passed, as the Treasury sold off its final stake last week. United Continental, meanwhile, had been wounded by high jet fuel prices earlier this year, which have since stabilized.

Both companies' stocks trade at attractive price-to-earnings growth metrics - AIG at 0.14 and United Continental at 0.92 - and both are expected to ramp up bottom line growth going forward. Over the past five years, AIG's earnings have experienced an average annual decline of -39.6% a year, while UAL's EPS has shrank by nearly twice that, but the sell-side expects quite a turnaround going forward. Leaner operations post-restructuring are expected to help AIG achieve annual EPS growth of 17-18% over the next five years, while UAL analysts expect it to grow EPS by around 13% annually.

Last but certainly not least, Goodyear is expected to grow earnings by nearly 40% in 2013 on the back of fortuitous - that is depressed - commodity prices, specifically oil. S&P also cites "increased miles driven," and an industry-wide "shifting [of] more domestic production to higher-margin premium tires" as near-team positives.

With a market value nearly at parity with the value of its cash on hand, in addition to a forward P/E below 6, there are many reasons for value investors to be excited about Goodyear as well. The company hasn't paid a dividend on its common stock since 2002, but there looks to be enough earnings-driven appreciation in Goodyear for investors of all styles.

For a longer look at Apple, David Tepper's 13F portfolio and his top stock picks in particular, continue reading at Insider Monkey.

This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has long positions in AAPL and C. The Motley Fool owns shares of Apple, American International Group, and Citigroup Inc and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend Apple and 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!

blog comments powered by Disqus