Billionaire David Tepper’s Long Term Picks Include Microsoft Corporation (MSFT)

We maintain a database of quarterly 13F filings from hundreds of hedge funds, including billionaire David Tepper’s Appaloosa Management. While one objection to the use of 13Fs is that the information is a bit out of date by the time they are released (Appaloosa’s most recent filing discloses many of its long equity positions as of the end of March), we’ve actually found that they can be useful in developing investment strategies; for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We can also use our database to find stocks which Tepper has owned for at least two years, and therefore probably still likes. Here is our quick take on Appaloosa’s five largest holdings from Q1 which it had at least $100 million invested in at the end of March 2011 (or see the full list of stocks the fund reported owning over time).

Credit: Microsoft Corporation (NASDAQ:MSFT)

Tepper and his team reported a position of 8.5 million shares in Citigroup Inc. (NYSE:C) in the filing. The bank had made our list of the ten most popular stocks among hedge funds during the first quarter of 2013 (check out the full top ten list) and, even after rising about 90% in the last year, still looks like a potential value play from some angles. Citigroup Inc. (NYSE:C) is still valued at a discount to the book value of its equity with a P/B ratio of 0.8, and with Wall Street analysts expecting its recent earnings growth (net income was up 30% in the first quarter of 2013 versus a year earlier) to continue it is valued at a forward P/E of 9.

The fund has been a fan of airlines the past couple years, and owned 8.5 million shares of United Continental Holdings Inc (NYSE:UAL) at the beginning of April. Investors typically hate the bankrupt-prone industry, but US Airways Group, Inc. (NYSE:LCC)’s pending merger with American Airlines has the potential to result in more pricing power for airlines due to industry consolidation. The sell-side is bullish on United Continental Holdings Inc (NYSE:UAL) (as well as many other airlines), and so the current price equals 6 times consensus earnings forecasts for 2014. Ken Heebner’s Capital Growth Management is another shareholder in United Continental (research more stocks Heebner owns).

Appaloosa slightly increased its holdings of The Goodyear Tire & Rubber Company (NASDAQ:GT) to a total of more than 15 million shares. As with airlines, Goodyear is a fairly high risk/high reward situation: the sell-side predicts enough earnings per share next year to make for a forward P/E of 7, but there are considerable liabilities (including pension liabilities as well as debt) and the stock is highly exposed to the overall economy with a beta of 2.3. SAC Capital Advisors, managed by billionaire Steve Cohen, had 8.6 million shares in its portfolio according to its own 13F (see Cohen’s stock picks).

US Airways Group, Inc. (NYSE:LCC) was another of Tepper’s long term picks, with the most recent filing disclosing ownership of close to 11 million shares. US Airways and American do share a number of frequent routes, potentially allowing for the company to gain pricing power there, though there are also integration risks from investing in US Airways as opposed to its peers. As with United Continental, the stock is cheap in terms of forward earnings estimates with a P/E multiple of 6 on that basis. Billionaire George Soros’s Soros Fund Management owned 7.8 million shares of the stock (find Soros’s favorite stocks).

Tepper has also been a long term owner of Microsoft Corporation (NASDAQ:MSFT). Business has been up at Microsoft, with new versions of Windows and Office powering double-digit growth rates compared to a year ago on both top and bottom lines. Of course, this should be only a temporary boost to the company’s financials. Microsoft Corporation (NASDAQ:MSFT) has recently announced a reorganization plan, and it may be worth following how effective this is in reducing costs. Fisher Asset Management reported a position of more than 17 million shares at the end of the first quarter of 2013; that fund is managed by billionaire Ken Fisher.

Disclosure: I own no shares of any stocks mentioned in this article.