Appaloosa Management filed its 13F earlier this month, disclosing many of its long equity positions as of the end of September. Appaloosa, which is managed by billionaire David Tepper, has about $16 billion under management. We noticed in looking at the 13F that a number of the fund’s largest holdings are contrarian picks- the conventional wisdom is that you’d have to be crazy to be investing in the company. Here are five of Tepper’s top stock picks which we think you hate:
Appaloosa increased its stake in Citigroup Inc. (NYSE:C) by 10% during the third quarter to a total of 10.2 million shares. Citi is up 53% in the last year, but it remains a steep discount to book value at a P/B of 0.6. Its revenue and earnings were down sharply in the third quarter versus a year earlier, but Wall Street analyst estimates imply a forward P/E multiple of 8. Adage Capital Management, another large hedge fund managed by Phil Gross and Robert Atchinson, more than doubled its Citi holdings last quarter to 6.9 million shares (find more stock picks from Adage Capital Management). We’d prefer a safer but slightly higher priced bank like JPMorgan Chase, but we acknowledge that there are significant opportunities here if Citi can stabilize its business.
The fund initiated a position in American International Group, Inc. (NYSE:AIG), closing September with 8.2 million shares in its portfolio; this made AIG one of Appaloosa’s largest holdings according to the 13F. AIG, along with Citigroup, actually made our list of the ten most popular stocks among hedge funds for the third quarter (see the full rankings) as many top investors have been getting into the stock this year. It currently trades at about half the book value of its equity, and at 9 times consensus earnings for 2013. We think that it’s a good value, regardless of its bailed-out status.
United Continental Holdings Inc (NYSE:UAL) was another conventional wisdom-defying stock that Tepper thought was a good value. Despite the generally accepted principle that airlines are bad investments, the fund reported owning 9.9 million shares of the stock. United Continental is a popular short- 12% of the shares outstanding are being shorted- despite the fact that analyst estimates for next year imply a forward P/E of 5. The five-year PEG ratio of 0.8 also suggests that the stock is a good value. We actually like the airlines despite their poor historical performance, though we doubt that United Continental is the best buy in the industry.
No list of contrarian stocks is complete without at least one auto-related company; luckily for us, Tepper’s fifth largest stock position by market value was The Goodyear Tire & Rubber Company (NYSE:GT). Goodyear has an interesting capital structure with a $2.8 billion market cap, $6 billion in debt, and $2.3 billion in cash; it also has substantial pension obligations and, with a beta of 2.1, is highly exposed to the broader economy. It carries trailing and forward P/Es of 14 and 5, respectively, with the five-year PEG ratio being 0.2. It would require considerable analysis to be sure, but it looks like the company has plenty of room to miss expectations and still prove undervalued.
Tepper also included US Airways Group, Inc. (NYSE:LCC) among his top ten stock picks to give Appaloosa further exposure to airlines. US Airways is seen as the most likely candidate to acquire American Airlines out of bankruptcy, which will give the company some integration risk but should also reduce competition. Its earnings have been improving- at least for now- and it trades at only 4 times trailing earnings with a five-year PEG ratio of 0.1. It too is a popular short, with the most recent data showing that shorts are responsible for 18% of the outstanding shares, but at that valuation it too could be an excellent buy even if there’s little change in net income going forward.