Appaloosa Management is a value hedge fund managed by billionaire David Tepper (whose name might sound familiar to any recent attendees of Carnegie Mellon’s Tepper School of Business). The fund has an estimated $16 billion under management. We have gone through Appaloosa’s 13F for the third quarter of 2012 and picked out a few of the fund’s investment themes. Read on for our discussion and compare Appaloosa’s picks to previous filings.
AIG. American International Group, Inc. (NYSE:AIG) was Appaloosa’s largest new position in the third quarter, with the fund reporting a position of 8.3 million shares. AIG had been a frequent buy among hedge funds during the second quarter, including fellow billionaire Dan Loeb’s Third Point, and even after rising 27% year to date AIG trades at about half the book value of its equity. The business is showing signs of improvement, with revenue rising rapidly last quarter compared to the third quarter of 2011, and it trades at 9 times forward earnings estimates. With much of the market still showing poor sentiment against the company, we think it could be a good value stock.
Airlines. The fund had bought shares of United Continental, US Airways Group, Inc. (NYSE:LCC), and Delta Air Lines, Inc. (NYSE:DAL) during the second quarter and added shares of each of those stocks during the third quarter as well. Investors typically fear investing in airlines because of the relatively high bankruptcy risk- many major airlines have declared bankruptcy at some point in the last 20 years- but we’ve been interested in the airlines as value stocks for some time because of their cheap valuations. The forward P/E multiples of these three airlines are in the 4-5 range, with Delta and US Airways having trailing P/Es in that range. Since Wall Street analysts expect considerable growth over the next several years, these results in very low five-year PEG ratios. The industry should drive somewhat low multiples, but the possibility that US Airways will take over American Airlines should also reduce competition and allow for prices to be raised. We’d avoid United Continental, specifically, because its business has not been doing as well recently but we like the other two airlines as value plays.
Autos. Appaloosa increased its positions in General Motors Company (NYSE:GM) and The Goodyear Tire & Rubber Company (NYSE:GT), which had also been among its largest positions at the end of June. GM has become a trendy value stock over the past few months, with billionaire David Einhorn of Greenlight Capital presenting it as a long pick at October’s Value Investing Congress (our analysis of Greenlight’s own 13F showed that fund buying shares during the third quarter). The automaker’s multiples certainly look good- it trades at 9 times trailing earnings- but its peers have P/Es in that same range or only slightly higher, and to put it bluntly they have better brand names than “Government Motors” does. With GM’s earnings actually slipping in the third quarter versus a year earlier, we think that hedge funds like Appaloosa should be looking elsewhere. To Tepper and his team’s credit, they’ve done that by also owning Goodyear. This is a risky stock with high debt loads and pension obligations, and its business was down last quarter compared to Q3 2011, but it trades at only 5 times consensus earnings for 2013 and carries a five-year PEG ratio of 0.2. It’ll probably underperform analyst expectations, but would have to see extremely poor performance in order to prove overvalued at current prices. We think it matches up well with auto parts companies and other alternative ways to play an auto thesis.
For the most part Appaloosa looks like it has picked out some good value stocks- major airlines and AIG look like good buys for investors. We’re less certain of how it’s playing a recovery in the auto industry, and while we can see an argument for Goodyear we’d prefer to own automakers other than GM.