Citigroup Inc (NYSE:C), Ford Motor Company (NYSE:F), and General Motors Company (NYSE:GM) are among Appaloosa Management’s interesting stock picks at the end of the second quarter. Appaloosa Management manages about $16 billion and is run by billionaire David Tepper. Not all of the fund’s positions are disclosed in its 13F filings with the SEC, but we still think that by looking at the filing and comparing it to past reported portfolios for Appaloosa Management we can get an idea of what Tepper and his team are thinking. Here are some trends that we have noticed in the 13F for the second quarter of 2012:
Airlines. Investors typically hate airlines, but Tepper and the rest of the Appaloosa staff think they are good bargains at current levels. The fund increased its positions in United Continental (NYSE:UAL), US Airways (NYSE:LCC), and Delta (NYSE:DAL), shrugging off concerns about macro weakness or rising fuel prices and putting all three in the top ten positions reported on the 13F. We had previously noted a large insider purchase at Delta; perhaps the factors which led the CFO to buy shares are having a positive impact on other companies in the industry as well. In addition, Wall Street analysts predict rises in earnings that the buy-side community is not anticipating: United, US Air, and Delta trade at forward P/E multiples of 4, 3, and 3 respectively, and all three have five-year PEG ratios under 0.3. Yes, they are airlines, but if a billionaire and successful investor can get past the stigma we think they are worth considering at these prices.
Goodyear. The carriers weren’t the only companies Appaloosa bought that operate flying objects. The fund added 2.5 million shares of tire company Goodyear (NYSE:GT), which we looked at earlier this month, bringing its position to 11.2 million shares. The company trades at 12 times trailing earnings, but sell-side analysts expect a strong performance next year and so the forward P/E is only 5 (and the five-year PEG ratio is only 0.1). It only trades at 3.5x trailing EBITDA, and while it would likely prefer auto sales to pick up it also makes money from consumer replacement of tires on their current cars- so its business stems from miles driven as well as from new sales, and has less downside if sales remain low.
Bailed-out value stocks. Tepper added to the fund’s positions in Ford Motor Company (NYSE:F) and Citigroup Inc (NYSE:C), and more than doubled its stake in General Motors Company (NYSE:GM). As with the airlines, this looks to have been a purely value decision: the lowest trailing P/E multiple out of these three companies belongs to Citigroup Inc (NYSE:C) at 8 (GM’s is 7 and Ford’s is 2). On a forward basis Ford and Citigroup share a P/E multiple of 6 while GM’s is 5; all three companies have 5-year PEG ratios below 0.8. Citigroup Inc (NYSE:C) likely has a number of junk assets on its balance sheet but it only trades at half the book value of its equity. As with Goodyear, we have already looked at Citigroup this month and suggested that a combination of Citi and JPMorgan Chase is a better bet than investor darling Wells Fargo based on book value or earnings multiples. The auto companies seem riskier to us- and, as we noted in our Goodyear article, we think that company has more paths to creating shareholder value- but they are low priced and now they have Tepper’s seal of approval. We would suggest buying these as well.
All three of these themes coalesce around value stocks which are closely tied to the broader markets and the economy, so in addition to following a value strategy we can see an argument that Appaloosa is becoming more bullish on the United States and Europe (a driver of profits for auto-related companies such as Ford, General Motors Company (NYSE:GM), and Goodyear). We’d recommend to investors that they copy off of Tepper’s unpopular shopping list- he and his team has found a number of stocks selling at low prices, and we think this portfolio is well positioned to deliver profitability.