Analyzing the Top Buys of Appaloosa Management
Sandeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Appaloosa Management is a hedge fund founded in 1993 by David Tepper. Since its inception, Appaloosa has netted investors 30.7% annual compounded returns. During the 2008-2009 recession, after posting negative returns (-26.7%) in 2008, the firm bounced back in 2009 and achieved a 117.3% return for the nine months ended on 30th Sep’09; making it the best-performing hedge fund with assets over $1 billion, according to data compiled by Bloomberg. In this article, I will be discussing Appaloosa Management’s top buys from the last quarter. The following is a list of top 5 buys.
|
Company Name |
No. of Shares Bought |
No. of Shares Held (at 6/30/2012) |
% of portfolio |
|
Citigroup |
3,171,717 |
9,266,022 |
7.85% |
|
Delta Air Lines |
2,783,380 |
9,523,569 |
3.23% |
|
Goodyear Tire |
2,588,576 |
11,240,072 |
4.11% |
|
General Motors |
2,511,163 |
4,713,316 |
2.87% |
|
US Airways |
2,269,452 |
12,926,695 |
5.33% |
Among these stocks, I believe Delta Air Lines (NYSE: DAL), US Airways (NYSE: LCC) and Goodyear Tire (NASDAQ: GT) offer great buying opportunity at significantly discounted valuations.
Delta Air Lines seems to be a significantly undervalued stock. Since 2009, the company has been aggressively paying down its debt and its lease adjusted net debt has dropped $5 billion. In the same period, though Delta Air Lines’ market cap has increased around $3.4 billion but its Enterprise Value (EV) has remained almost the same despite 30% higher sales and a 9 point improvement in margin. Delta has one of the lowest operating costs among the large network carriers. In order to further reduce its costs, the company has bought Trainer refinery in Pennsylvania which will help in realizing $300 million of savings in annual fuel costs. Going forward, cost pressures are expect to ease in 2013 and might totally diminish in 2014. Service upgrades are largely completed and productivity should start to benefit costs in early 2013. I think Delta’s various initiatives should generate meaningful long-term value for shareholders and recommend buying it.
American Airlines sent non-disclosure agreements to a number of airlines last month and finally the deal has been signed with US Airways on 31st Aug’12. The deal will allow the two companies to share confidential information so they can evaluate a potential combination. If the merger takes place, it will make the resulting company the world's largest airliner. Thus, going forward, this represents a huge potential catalyst for US Airways stocks. Though US Airways’ shares have gained over 10% following this announcement, I believe there is a further scope for stock appreciation as the company is still trading at a forward P/E of just 3.5. Moreover, I believe that the positive impact of lower fuel prices and the industry’s continued capacity discipline on earnings should substantially outweigh the slowing unit revenue growth.
Goodyear Tire trading at ~5x forward earnings, is the cheapest stock in the auto industry today and the investors seem to be overlooking the recent developments in the company. In a year that should see a continued recovery in global volume, improving mix (aftermarket and commercial) and further cost savings, Goodyear's future earnings outlook is bright and may receive a second look from the market. Moreover, oil, natural rubber and synthetic rubber prices are easing after posing years of cost pressures. Natural rubber (about 25% of raw material cost) prices saw a 31% year-over-year decline in Q2 (8% sequentially). Synthetic rubber (about 25% of raw material cost) saw a 2% year-over-year decline. Oil prices have also dropped over 20% after trading over $100/barrel this year. Thus, given easing cost pressures I expect a margin recovery. Investor concerns over the pension liabilities at Goodyear have weighed heavily on stock prices. However, company has been successfully meeting its pension obligations and its pension funded status seems significantly improved.
Bottom Line
The stocks of Delta Airlines, US Airways Group, and Goodyear Tire have extensively underperformed in the past few years and as a result have a very low PE. However, these companies have a strong growth outlook and look highly undervalued on the PEG basis (Delta Airline has a PEG ratio of 0.06, US Airways has a PEG ratio of 0.12 and Goodyear Tire has a PEG of 0.15). The approval of David Tepper, the master of distressed investing, makes me even more comfortable. Thus, I expect a good recovery in these stocks and recommend buying them.
sandeep2gupta has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.
