Which Stocks Did this Top Investor Buy?

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

I like to analyze what prominent investors buy or sell in the last reported quarter. In this article I detail what Appaloosa Management bought in the past months. As mentioned in my blog, I think it is essential to track hedge funds holdings. Appaloosa was founded by David Tepper, who made $4 billion in 2009 and currently ranks as the 258th richest person in the world. Let's evaluate which stocks Appaloosa invested in.

The fund initiated a position in American International Group (NYSE: AIG) at an average price of $32. It is remarkable that AIG has paid back its debt to the U.S. government, and is poised to grow faster than the industry as it works to lower its high combined ratio. In terms of valuation, AIG also appears inexpensive relative to peers. The price/ sales ratio is 0.7x, compared to an industry average multiple of 0.8x, and AIG's price/book ratio is just 0.5x, versus an industry average of 0.9x.  In the near term, AIG's continued portfolio optimization should free up additional capital that can be returned to shareholders. I think Appaloosa bets that longer term, the company's operational turnaround will unlock AIG's intrinsic valuation.

Appaloosa also started a position in JPMorgan (NYSE: JPM) at an average price of $37.50. I like the current loan trend in the whole banking sector. In fact, Oppenheimer recently issed a report explaining that JPM's commercial banking segment is doing very well, earning about a 24% return on its allocated capital (7% of total JPM revenues), and YTD loans are up 16%. CEO Doung Petno said: ¨Everyone is back in business." I am bullish on the whole financial sector from a mid to long term perspective. Appaloosa seems to be positioning for a banking recovery in 2013 by holding AIG, JPMorgan and Citigroup as core positions.

The fund also bought several stocks in the auto sector. Appaloosa added to its existing positions in General Motors (NYSE: GM), Ford (NYSE: F) and Goodyear Tire. GM trades at just 9x P/E and is poised to benefit from continued recovery in the U.S. market, as well as a significant product upgrade cycle. I think the next catalyst could be a restructuring announcement in Europe during 2013 and continued reported growth in China and Brazil. David Einhorn, founder of Greenlight Capital, thinks that GM has not been given credit for its improved competitive and financial position post-bankruptcy. Ford is also cheap and it has just announced a strong European restructuring plan, which presented a credible path to breaking even. Ford is also very cheap at just 8x forward P/E and 2.2x P/BV.

Goodyear remains focused on cost saving and growth. In fact, the company has achieved gross savings of $748 million between 2011 and 2012. The company is also increasing its capacity to produce high value-added tires by 50% and increase its low-cost capacity to 50% of its global total. The stock is cheap at 6.7x Zacks 2012 EPS estimate of $1.87 for 2012. As we can see from the examples of GM, Ford, and Goodyear, Appaloosa likes inexpensive stocks.

In the whole third quarter, the fund was almost a whole net seller of technology stocks and indices. In fact, Appaloosa reduced its existing positions in Oracle, Google, and the Nasdaq Index. The fund did not added to EMC and Apple. But Appaloosa portfolio managers keep buying just two technology stocks that are exposed to the mobile trend: Qualcomm (NASDAQ: QCOM) and Broadcom. 

Qualcomm is exposed to the mobile trend and trades at a forward P/E of just 13x. The company gained Apple as a firsttime
customer in 2011 as Apple ramped its first-generation CDMA iPhone (an EV-DO iPhone 4) at Verizon. With sales of the iPhone 5 now ramping up and potentially expanding into China and other emerging countries, I believe Qualcomm’s market share could approach 100% at Apple in 2013, up from around 35% in 2011 and 78% in 2012. In addition, Qualcomm could see solid growth for non-phone devices. Qualcomm already supplies a high percentage of the chipsets used in the data card market and has a strong position in embedded solutions for tablets and some machine-to-machine markets. I expect these markets to keep growing. In other words, QCOM combines both growth and an attractive valuation.

In the last earnings report, Broadcomm continued to outperform its peers with strength coming from all three of its market sectors: set top boxes, handsets, and communications infrastructure. Longer term, Appaloosa may believe that the company is well positioned for growth in all three of its market segments as macro-economic issues improve worldwide. The stock trades at just 11x forward P/E.

In conclusion, Appaloosa is a value oriented hedge fund that looks for solid companies trading below its intrinsic valuations. It is essential to keep track of which stocks these kind of portfolio managers select because they usually have better access to information and resources than a small individual investor.

 



martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group, JPMorgan Chase & Co., and Qualcomm and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group and General Motors Company. 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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