Billionaire hedge-fund manager David Tepper runs Appaloosa Management, the $15-billion multi-strategy hedge fund. CNBC reports that Tepper is currently “extremely bullish” on the U.S. stock market and predicts the S&P 500 may rise “20% or more by the end of this year.” Tepper is also particularly bullish about Apple Inc. (AAPL)—last quarter, he raised Appaloosa’s stake in AAPL so as to make the tech firm the hedge fund’s single largest holding. Tepper’s stock picks were big winners last year, as his flagship hedge fund returned 30% for the year. This year to date, the same flagship fund is reportedly outperforming the S&P 500 Index. Based on Appaloosa Management’s recently filed fourth-quarter 13F disclosure, the fund picked 12 new stocks and dumped 11 stocks last quarter. Here is a closer look at Tepper’s three picks and three pans that pay dividend yields around a 2.0% threshold.
Metlife Inc (NYSE:MET) was one of Appaloosa’s new picks last quarter. The hedge fund purchased nearly 3.4 million MET shares, which were valued at about $112 million at the end of 2012. Recently, we wrote about the stock as one of the bullish bets by billionaire Jim Simons’ RenTech. The insurance provider pays a dividend yield of 1.8% on a payout ratio of only 14%. It beat analyst estimates in each of the past four quarters, with financial performance driven by higher premiums, fees, and net investment income. MET has a high long-term EPS CAGR of 12.2%. The company was one of the four U.S. financial institutions that failed the Fed’s stress test last year. This year, however, Metlife Inc (NYSE:MET) stepped out of the Fed’s oversight as it sold its banking operations to GE Capital. The removal of Fed supervision gives MET more flexibility, improving its competitiveness and the ability to diversify earnings. It also improves the insurer’s flexibility to deploy capital through share buybacks and dividend increases. However, there are speculations that MET may be designated a non-bank systemically important financial institution this year, which will bring it back under the Fed’s regulatory clout, with possible adverse implications due to stringent capital requirements. Metlife Inc (NYSE:MET) is trading at a 30% discount to its book value and a 36% discount to the price-to-book of its peers.
ENSCO PLC (NYSE:ESV), an offshore contract driller, was another Appaloosa’s new pick last quarter. The hedge fund purchased more than 720,000 shares of ESV, valued at nearly $43 million at the end of last year. The purchase was part of the fund’s general interest in the oil and natural gas service sector, including acquisitions of stakes in Transocean (RIG), Weatherford International Ltd. (WFT), and Noble Corp. (NE). ENSCO PLC (NYSE:ESV) pays a dividend yield of 3.3% on a payout ratio of 30%. In February, the company hiked its dividend by 33% to $2.0 annually, citing “a very bullish outlook in terms of customer demand for both deep- and shallow-water offshore markets,” which gives the firm “significant visibility into future cash flows.” Barclays forecasts the record capital spending on oil and natural gas exploration and production in 2013 and believes that the industry is in “a multi-year, double-digit growth spending upcycle internationally.” This bodes well for ENSCO PLC (NYSE:ESV), whose long-term EPS CAGR is forecasted at a robust 27%. The stock is also attractive based on its below-industry price-to-book of 1.2 and a forward P/E of 8.9x.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), the world’s largest publically-traded copper producer, was also a new pick in Appaloosa’s fourth-quarter portfolio. The hedge fund purchased 520,000 shares, valued at nearly $18 million at the end of last year. The company may have been interested as a merger arbitrage play or a value play on the acquisition of McMoRan Exploration (MMR) and Plains Exploration & Production Company (PXP), which marks FCX’s entry into the oil and natural gas exploration and production business. Shareholders generally disapproved this move by Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), considering it too costly, as the company tapped the capital markets to raise $6.5 billion in senior notes through private placements in order to finance the acquisitions. As a result, FCX is trading down 12% since the announcement. While some analysts are upgrading the stock on “strong copper fundamentals,” the outlook for copper prices remains weak, despite some investment banks’ recent increases of their 2013 price projections (see the last-available World Bank’s Commodity Price Forecast Update). Still, FCX appears to be good value, as it is priced at 7.5x forward earnings versus 13.4x for Southern Copper Corp. (SCCO) and 9.4x for Newmont Mining Corp. (NEM). Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) pays a dividend yield of 3.8% on a payout ratio of 28%.