We track quarterly 13F filings from hundreds of hedge funds, including billionaire David Tepper’s Appaloosa Management. We have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year, and think that more strategies are possible as well; our own portfolio based on our small cap strategy (see the details here) achieved an excess return of 33 percentage points in the last 11 months. Of course, a more common use of 13Fs is to treat them as a source of initial investment ideas which can then be researched further if they seem interesting. When we went through Appaloosa’s most recent 13F compared to its previous filings (see Tepper’s stock picks over time), here are three things which we noticed:
Citigroup. Citigroup Inc. (NYSE:C) had been the fund’s largest single-stock position by market value at the beginning of April, and over the following three months Tepper increased his stake in the bank to a total of 9.6 million shares. Citi is up about 80% in the last year, but still trades at a discount to the book value of its equity with a P/B ratio of 0.8. Business has also been going well- as it has at many other megabanks- and as a result earnings grew by over 40% in the second quarter of 2013 versus a year earlier. With Wall Street analysts bullish on its prospects for 2014 the forward P/E is only 9 with a five-year PEG ratio well below 1. Billionaire Ken Griffin’s Citadel Investment Group has also included Citigroup Inc. (NYSE:C) among its top picks (find Griffin’s favorite stocks).
Goodyear. Another large position which Appaloosa added to during Q2 was The Goodyear Tire & Rubber Company (NASDAQ:GT). Between its natural exposure to the overall economy, high leverage, and high implied leverage through pension obligations, the stock has a high beta (of 2.4) and so the fund’s position demonstrates how bullish Tepper and his team are on the overall market. The company has made some progress in cutting costs, according to recent reports, and the sell-side is optimistic here as well with the stock trading at 7 times consensus earnings for 2014. SAC Capital Advisors, managed by billionaire Steve Cohen, had owned 8.6 million shares of The Goodyear Tire & Rubber Company (NASDAQ:GT) as of the end of the first quarter of 2013 (see Cohen’s stock picks).
Selling two popular hedge fund picks. In the first quarter of 2013, the most popular stock among hedge funds was Apple Inc. (NASDAQ:AAPL) (check out the full top ten list); in the previous quarter, that slot had been held by American International Group Inc (NYSE:AIG). Each of these two had been among Tepper’s nine largest single-stock positions in his last 13F, but by the beginning of July neither of them was as he reduced each position by about a third. AIG is still valued at a discount to book (the price-to-book ratio here is 0.7) and it is another stock where analysts are predicting considerable improvements in earnings per share on a forward basis. Part of the reasoning behind this is that AIG is selling off assets which may allow management to better focus on the core business.
Apple Inc. (NASDAQ:AAPL) is still down significantly from its levels a year ago, even after billionaire activist Carl Icahn has gotten involved in the stock to push for a larger share buyback. The company has a large position in cash and marketable securities; if those are included in the market cap, the earnings multiples are still low. This signifies that at current levels markets are pricing in continued declines in profits, though possibly at a lower rate than the decreases Apple has recently been reporting.