David Tepper is the founder of Appaloosa Management. He has become one of the world’s richest men by betting on distressed stocks (read more about David Tepper) – something he does very well. Tepper has a strong track record for spotting stocks with a lot of upside potential and the means to make it happen, making him one of the hedge fund managers we pay careful attention to.
Appaloosa Management’s 13F portfolio shrunk in size considerably from the end of the third quarter, when it had 50 positions collectively valued at $1.54 billion. According to a 13F filed with the SEC on February 14, Appaloosa Management had just 29 holdings, with a total value of $764.82 million, at the end of the fourth quarter. The largest of these positions was a $93.74 million holding in CVR Energy (CVI). Appaloosa had over 5.00 million shares in the company at the end of the fourth quarter. As significant as the position was at the end of December, it is significantly smaller than it was at the end of the third quarter, when Appaloosa held 6.31 million shares in the company, with a total value of $133.38 million.
CVR Energy opened trading on February 15 at $27.93 a share on a mean one-year target estimate of $30.50 a share (range $27 to $35). The upside may be conservative, but the stock is priced low at 8.31 times its forward earnings. CVR Energy is also priced low relative to its peers. Take HollyFrontier Corp (HFC) for instance. It is priced in the same ballpark, at 7.94 times its forward earnings but it has much less upside. HollyFrontier opened at $34.44 with a mean one-year target estimate of $34.92. Another positive about CVR Energy is hedge fund interest. Carl Icahn offered to buy the company for $30 per share this week. Icahn’s involvement doesn’t necessarily mean that the stock will be sold at a large premium though. His track record is mixed on this front. Last year he made a similar offer for Clorox and unsuccessfully tried to entice other buyers to bid for the company.
David Tepper was also bullish on Goodyear Tire & Rubber Co (GT). His Appaloosa Management had 6.06 million shares in the company at the end of December, for a total value of $85.83 million. It was the fund’s second largest holding. Goodyear was David Tepper’s second largest position at the end of the third quarter as well but the fund held a much larger stake then – 10.76 million shares valued at $108.59 million. Goodyear opened trading on February 15 at $13.28 a share on a one-year target estimate of $19.21 (range $15 to $22). Goodyear is priced super low relative to its future earnings, with a forward P/E of just 4.83. Carlisle Companies (CSL) is Goodyear’s closest competitor by market cap ($2.91B vs. Goodyear’s $3.20B). However, Goodyear looks to be the better bet. Carlisle opened at $47.73 a share on a one-year target estimate of $54.50 and is priced higher at 11.20 times its forward earnings.
Appaloosa Management’s third largest position at the end of the fourth quarter was in Apple (AAPL). The fund held 181,850 shares in the company, for a total value of $73.65 million. This represents a significant increase from Appaloosa’s holdings in the company at the end of the third quarter, when it had had just 38,119 shares, valued at $14.53 million. Appaloosa also held significant stakes in Dean Foods (DF), Macy’s (M), Microsoft (MSFT) and the International Paper (IP) at the end of the fourth quarter. Apple and Microsoft are two of the 5 most popular stocks among hedge fund managers for more than a year. Value investor David Einhorn’s top two positions are these two stocks. The reason is simple. These stocks are extremely undervalued, trading at around 7-8 times their forward earnings and they have huge amounts of cash on their balance sheets. They are also expected to grow their earnings between 10-20% annually. Now is the time to buy them.