I like to analyze what prominent investors buy or sell in the last reported quarter. In this article I detail what Appaloosa Management bought in the past months. Appaloosa was founded by David Tepper, who made $4 billion in 2009 and currently ranks as the 258th richest person in the world.
It’s always interesting to peek into hedge fund managers’ trade book, getting a glimpse of the evolution of their positions quarter by quarter. In the case of Tepper and Appaloosa, one sees a very fluid portfolio, with high turnover as the size of its positive equity position oscillates dramatically.
Tepper is quite bullish on big-cap technology, which is evident in his Apple Inc. (NASDAQ:AAPL), QUALCOMM, Inc. (NASDAQ:QCOM), Google Inc (NASDAQ:GOOG), EMC Corporation (NYSE:EMC) and Microsoft Corporation (NASDAQ:MSFT) positions. Technology represents an important part of Tepper´s overall portfolio.
Apple: Tepper thinks you should buy!
Tepper holds 10.5% of his portfolio in Apple Inc. (NASDAQ:AAPL) at an average cost of $492 a share. Last quarter, he increased his position by 75%.
I think the market has been selling Apple because iPhone 5 sales have not arrived as expected. Apple faces rising competition from Android devices, and concerns about the ability of the company to hold together its management team in the post-Steve Jobs era. In addition, sales of mobile phones around the world fell last year for the first time since 2009. This fact was driven by tough economic conditions, shifting consumer preferences, and intense market competition that weakened the worldwide mobile phone market.
I think that Tepper invested in Apple Inc. (NASDAQ:AAPL) because he likes to bet big in one of the nation’s premier brands that trades at a mid single-digit P/E, net of cash, and has a fortress-like balance sheet with opportunities to unlock significant shareholder value. Apple has already made the transition to a “value play” (from a growth story). I also think that Apple innovation is not over. Tim Cook highlighted that in his latest appearance:
“We’re working on some incredible stuff, and the pipeline is chock full,” Cook said. “We feel great about what we have in store.”
Tepper seems not to have thrown in the towel on Apple Inc. (NASDAQ:AAPL) as many other hedge fund managers did (Daniel Loeb and Leon Cooperman, among others).
Apple could also increase its margins by launching an Apple-branded watch that could sell millions of the watches, and generate a margin of about 45 percent. In addition, Apple has not fully explored the field of TV and gaming, so the opportunities in both segments are still there.
In conclusion, although the playing field has gotten more competitive, Apple Inc. (NASDAQ:AAPL) is still performing well and has momentum. Apple still carries a lot of potential to perform well this year, and I remain confident in the company. I think Tepper made a good bet here.
EMC: a great tech leader
Appaloosa also increased the position in EMC Corporation (NYSE:EMC) by 47%. In addition to Tepper, top portfolio managers Lee Ainslie, Ray Dalio, Jeremy Grantham, Joel Greenblatt and Andreas Halvorsen initiated or increased their holding in this company during Q4. This is evidence that great fundamental investors think that EMC is a great opportunity at current levels.
EMC has many positives in its core business model:
- Low CapEx business model: the company converts almost 80% of its operating cash flow as FCF.
- High operating margin: EMC’s operating margin is ranked higher than 90% of the 234 companies in the
- High EPS growth: EMC’s EPS growth (%)is ranked higher than 85% of the
companies in the Data Storage industry
- Expanding operating margin: EMC’s operating margin is expanding. Margin expansion is usually a good sign.
Given the pull back in EMC’s shares closer to a big support level of $23 and driven primarily on disappointing guidance for VMW license growth, I believe that EMC’s valuation is attractive and the underlying Information Storage fundamentals remain compelling despite it dependence on enterprises’ willingness to spend. Tepper may think that EMC will benefit from a rebound in spending this year as IT managers under-spent in 2012 and EMC’s storage portfolio is expected to have solid product cycles in 2013 including a VNX refresh according to a recent research from boutique firm Monness Crespi.
Microsoft: the stock is cheap at current levels
Tepper increased his position in Microsoft Corporation (NASDAQ:MSFT) by 179% last quarter. In fact, it is interesting to note that since 2008, Tepper has bought shares or increased his position only at periods when the stock traded in the range between $25 and $27. Last quarter was no exception to that trend as Tepper bought 2 million shares at an average price of $27.
I like Microsoft´s business model and fundamentals, including a very high operating margin of 36.2%, ROE of 35%, continued FCF increases since 2009 and light capex in relation to its operation cash flows. Microsoft continued to produce modest operating income growth and attractive cash generation.
In addition, shares appear to be compellingly priced as the company has a high earnings yield combined with a high ROC.
In the last earnings report, Microsoft reported a solid quarter, highlighted by continued adoption of Windows 8 (>60 million sold), Server & Tools and Bing Search monetization. In the call, management expressed that enterprise demand remains healthy, as customers continue to add products and additional seats to their enterprise agreements. I like Microsoft’s Surface tablet and the company is ramping production to market the tablet in 14 additional countries in the upcoming quarter.
I think that Microsoft does offer a reasonable margin of safety at its current price of $27.50 and could be an attractive opportunity for investors that bet on the potential growth that Microsoft could achieve in both cloud computing (Office 360) and its own hardware products (Surface, Phones, etc).
The article 3 Unique Companies at Undervalued Prices originally appeared on Fool.com and is written by Laura Paur.
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