How Did Billionaire David Tepper Make $2.2 Billion In 2012?

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

Billionaire hedge fund manager David Tepper's Appaloosa Management hedge fund returned some 30% in 2012, earning Tepper a cool $2.2 billion. This was more money than any other hedge fund manager in the industry made during 2012. So how did he do it? I dug a bit deeper into Appaloosa's major holdings in 2012 and outlined the hedge fund's big bets that paid off (see all of Appaloosa's stocks).

Tepper made a big bet on Apple (NASDAQ: AAPL) during the fourth quarter, upping his stake by 75% the quarter. Apple is now Appaloosa's top public equity holding, making up over 10.5% of his portfolio. The tech giant is quite the industry leader when it comes to smartphones and tablets. For the company’s 2012 fiscal year, it saw iPhone and iPad sales up 71% and 59% year over year, respectively. But its iPhone is its true money-maker, making up 50% of revenues last quarter (read more about why it's time to buy Apple). Apple competes with other major tech company Google when it comes to mobile operating system, and remains at number two as of the end of 2012.

Mobile Operating System Market Share (4Q 2012, source: Gartner)

1.  Android 70%

2.  iOS 21%

3.  Blackberry 4%

Although Apple is still battling with Android as the top mobile phone operating system, Apple also holds a strong position in the hardware market, coming in third; whereas Google’s Motorola is ninth, with 2% of the market share.

Mobile Phone Market Share (4Q 2012, source: Gartner)

1.  Samsung 23%

2.  Nokia 18%

3.  Apple 9%

Apple is one of the cheapest "big" tech stocks in the industry, trading at only 10x earnings, whereas Google is trading at over 20x. Is this fair? There has been much speculation over Apple's recent decline, but the tech company appears to be a compelling investment opportunity with leading smartphone and tablet market positions, and a PEG of only 0.5 (below 1.0 is a great growth at a reasonable price opportunity). 

Qualcomm (NASDAQ: QCOM) was another of Appaloosa's big bets during the fourth quarter, as the fund upped its stake 20%, and is its sixth largest holding as of 4Q. The tech company plays a big part in 3G wireless technologies and smartphones. This includes wireless networks in emerging markets, including China and India. Worth noting is that over 85% of all networks support 3G, which is a big positive for Qualcomm. 

Qualcomm is a major chipset supplier for Samsung, which is currently the largest seller of smartphone globally, owning 23% of the market share (see above). The product portfolio for Qualcomm is not just reliant on smartphones, but also devices that are adopting 3G and 4G connectivity, including tablets and eReaders, with the entire non-phone related segment expected to grow some 40% annually through 2015 (see why Qualcomm beats out major competitor AMD).

Tepper's Bet On Financials.

American International Group (NYSE: AIG) was one of Appaloosa's big bets during the third quarter, taking a new positon in the insurance company and making up 6.7% of the Appaloosa's portfolio. AIG managed to post last quarter earnings results of $0.20, compared to $0.77 for the same quarter last year; however, the twenty cents still managed to beat expectations of a $0.07 per share loss handily. With a 12x price to earnings multiple (industry average) on Wall Street's 2014 EPS estimate, AIG's target price is upwards of $47, which is still below book value and a 23% upside from current trading levels. Whitney Tilson is also a big fan of AIG, one of his top five holdings (read more here).

Appaloosa took a new position in Citigroup (NYSE: C) during the first quarter of 2012, then upped it 50% during the second quarter, making the bank as the fund's third largest holding. Last quarter the bank began showing improved results, where loans increased 6.5% year over year, and revenues were up 3.3%. The bank also appears cheap, as the average forward price to earnings ratio for the banking industry being around 11x, but Citi trades at 8x. Put that industry average 11x P/E on Citi’s 2013 Wall Street EPS estimate, and Citi undervalued by nearly 15% (see more about why Citi's a top bank).

Both of Tepper’s major bets on financials, AIG and Citi, still trade below their book values, making them solid investments as investors realize that their respective turnarounds are catching hold.

Betting On Airlines.

United Continental Holdings (NYSE: UAL) was another one of Appaloosa's big bets during the first quarter of 2012, upping its stake 570%. The fund has kept its stake relatively stable, and still has the airline as its fourth largest holding, making up 4.25% of its portfolio as of the end of 2012. The integration of the Continental merger has left some overhang on the shares, causing the company to trade at only 0.24x sales, compared to Delta's 0.34x. However, the ultimate merger integration will broaden United's network and lower the company’s return on the cost of capital. The improved international routes should combine with the major cost and revenue synergies and help expand the airlines’ trading multiples over time, leading to price appreciation.

Don't be fooled. 

All of Tepper's stocks outlined above still trade at very reasonable PEG ratios, suggesting they are all solid "growth at a reasonable price" opportunities (being below 2.0).

Price to Earnings to Growth

  • Apple 0.5
  • Qualcomm 1.4
  • AIG 0.7
  • Citi 1.4
  • United Continental 0.5

This is in part due to all of their relatively cheap valuations and solid expected growth rates.

5-Year Expected EPS Growth (Wall Street estimates)

  • Apple 19%
  • Qualcomm 15%
  • AIG 22%
  • Citi 12.5%
  • United Continental 15%

Tepper continues to exert himself as one of the top hedge fund managers, with his fund Appaloosa Management generating average annualized returns of approximately 30% since inception in 1993. His firm has made a couple big bets on the tech industry, Apple and Qualcomm, during 2012, while making money off financials with stakes in AIG and Citi. Meanwhile, Tepper also had a bet on United Continental. It appears all of Tepper's investments, while helping push the fund higher in 2012, should also be solid investments in 2013. 


mhargra has no position in any stocks mentioned. The Motley Fool recommends American International Group and Apple. The Motley Fool owns shares of American International Group, Apple, Citigroup Inc , and Qualcomm and has the following options: Long Jan 2014 $25 Calls on 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!

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