David Tepper founded Appaloosa Management in 1993 and now oversees nearly $16 billion in assets under management. Prior to Appaloosa, Tepper was a trader at Goldman Sachs. The fund manager continues to crush his competition in 2012, as his Palomino fund was up 13% net of fees for the first half of 2012. Appaloosa utilizes a strategy that focuses on undiversified concentrated investments (check out Tepper’s newest stock picks).
The U.S. chemical company Huntsman Corporation (NYSE:HUN) is Tepper’s 10th largest 13F holding, with a dividend that yields 2.5%. Compared to other major chemical companies, Huntsman trades the cheapest in the industry at 7.5x earnings, where Eastman is at 15x and Dow Chemical is at 23x. Huntsman has been surprising analysts with its earnings postings, and saw its most recent EPS come in at $0.70, above consensus of $0.51. We believe Huntsman offers significant value in addition to its dividend, where the stock is trading with a PEG ratio of only 0.9.
Sealed Air Corp (NYSE:SEE) is a food safety company that was a new third quarter pick for Tepper, and it pays a 3.1% dividend yield. Sealed has seen softness in its European markets, but expects organic growth to come from Latin America and Asia over the intermediate term. Other growth should come from the recent acquisition of Japan’s Diversey. The food safety products company does have a restructuring plan that should help to improve margins in 2013 and grow EPS by over 30%, despite expected revenue growth of only 1%. These restructuring efforts are expected to turnaround Sealed Air’s recent string of four straight quarters of negative EPS, and should put the company to trade at 13x forward earnings, below major peers. Billionaire Israel Englander – founder of Millennium Management – is bullish on Sealed Air, having upped his 2Q stake 100% (see Englander’s newest bullish bets).
Macy’s, Inc. (NYSE:M) is a high-end retailer that operates Macy’s and Bloomingdale stores, and pays a 2% dividend yield. Macy’s should see positive results from the upcoming holiday season, especially due to its higher-income customer base that is more insulated from the broader economy. The retailer is expected to see strong same store sales of 3% in fiscal year 2014 and 3.9% growth next year. Investors can still find value in the high-end retailer, which trades at a 12.5x trailing P/E and a mere forward P/E of 10x. Macy’s solid growth prospects put its PEG ratio at 0.9 and suggest the stock might be undervalued. Macy’s is one of the top ten retail stocks loved by hedge funds (check out our entire Top Ten List).
JP Morgan Chase & Co. (NYSE:JPM) was a new position for Tepper last quarter, and the bank stock currently pays a 3% dividend yield. Following a decline in net revenues of 5% in 2011, JP Morgan expects to see growth of 0.5% by the end of this year. Obviously, JP Morgan is feeling the pressure of the present low-rate environment, with projected net interest income to fall 7% in 2012 and fall again by 2% in 2013. Even with net interest income being pressured, JP Morgan is still one of the best-in-industry bank stocks with loan growth expected to be 1% and interest earnings asset growth of 1.8%. The bank also has an improving loan portfolio with charge-offs expected to down from $12.2 billion in 2012 to $10 billion in 2013. JP Morgan also managed to receive recent approval to reinstate its $15 billion share repurchase program. In terms of valuation, JP Morgan is near the low end of the industry at 0.8 times its book value, making it a decent value play, notwithstanding the fiscal cliff.
Two Harbors Investment Corp (NYSE:TWO) pays the highest yield of our five dividend stocks at 12.3%. The REIT is Tepper’s 23rd largest 13F holding. During the third quarter, Two Harbors managed to increase its book value by 15% from 2Q. As one of the top REITs investing in residential mortgage backed securities, Two Harbors does trade at the upper end of the industry with a 15x P/E and 1.4x P/B. We believe, however, that the company still has solid growth prospects moving forward, having recently completed a public offering for almost $600 million to pursue further acquisitions.
To recap: the chemical company Huntsman offers solid value and has a diversified product that is used in a variety of industries, offering some production from economic uncertainty. Sealed Air has seen weakness in Europe, but we believe the food safety company will make up the difference with increased demand in the U.S., and Macy’s has shown the ability to perform well despite economic uncertainty. We see JP Morgan as a best-in-industry bank that pays one of the highest and more stable dividends, while Two Harbors offers investors an outsized dividend, but it might be too speculative for some.
