Billionaire David Tepper’s Cheap Stock Picks

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

One of the most common stock screens is the price-to-earnings multiple, as it places a stock’s valuation in the context of its actual (or projected) earnings numbers, providing a basic metric for fundamental analysis. While we primarily use our database of quarterly 13F filings from hedge funds and other notable investors to help us develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), we also like to screen picks from top managers in search of free initial investment ideas.

Here are the five largest positions in billionaire David Tepper’s Appaloosa Management’s most recent 13F with both trailing and forward P/Es of (or see the full list of stocks Appaloosa reported owning):

The fund cut its stake in Apple (NASDAQ: AAPL) by 41% between January and March but still owned 540,000 shares. Apple was the most popular stock among hedge funds during the first quarter of 2013 (check out the full top ten list) after having temporarily lost its place to AIG towards the end of last year. Apple trades at 10 times earnings, whether we consider trailing numbers or forward estimates for the fiscal year ending in September 2014, and that’s before accounting for the company’s cash hoard. The market is pricing in further earnings declines, and so it might be worth watching for any signs Apple’s business might be stabilizing.

Appaloosa reported close to 11 million shares of US Airways (NYSE: LCC). Many investors despise notoriously unprofitable airlines, with the result being that the stock is valued at only 6 times forward earnings estimates. US Airways is acquiring American Airlines out of bankruptcy, which some analysts believe could help support price increases among legacy carries and on shares US Airways-American routes in particular. That’s a possibility, and we do think that the stock is worth a look, but we would be somewhat concerned about integration risk and might prefer the company’s peers.

$18 billion market cap hospital stock HCA Holdings (NYSE: HCA) was another of Tepper’s cheap stock picks with the filing disclosing ownership of 4.3 million shares. While the company’s revenue was about flat last quarter compared to the first quarter of 2012, net income fell considerably. Wall Street analysts are projecting a reversal, as shown by the fact that the trailing and forward P/Es are 13 and 11, respectively. Those valuations do place HCA close to value territory, though as with Apple, we’d have to be more confident that the company can maintain its current business.

According to the 13F, Appaloosa slightly increased its holdings of General Motors (NYSE: GM) to a total of 5.7 million shares. The trailing P/E here is 12, with analysts looking for rapid growth over the next several years: the forward earnings multiple is only 8 with a five-year PEG ratio of 0.70. Some bulls on the automakers have suggested that the U.S. consumer auto fleet is historically aged, providing some upside from pent-up demand; however, GM’s earnings fell 11% in the first quarter of 2013 versus a year earlier on weakness in other markets.

Tepper and his team were apparently bullish on autos in general, owning almost 12 million shares of Ford (NYSE: F) as well as their position in GM. Ford reported better growth numbers in its most recent 10-Q than GM did, and is actually valued at a small discount to its American peer in terms of trailing earnings numbers with a multiple of 11. Even though the sell-side is less optimistic here over the long-term, the stock seems to be at least as attractive as GM and we’d say Ford is well worth comparing to other automakers.

Foreign automakers such as Honda and Toyota may have better prospects, though they also trade at a premium to Ford and GM, making for an interesting comparison. As we’ve mentioned, US Airways also has strengths and weaknesses relative to its peers, and so investors shouldn’t be too quick to jump on its low multiples. We’ve also discussed that expectations are low for Apple, and while we would guess that earnings will continue to fall, the company is certainly worth monitoring for any positive developments.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Apple.The Motley Fool recommends Apple, Ford, and General Motors. The Motley Fool owns shares of Apple 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!

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