Marvell Technology Group Ltd. (NASDAQ:MRVL), a semiconductor maker, was dumped from Appaloosa’s fourth-quarter portfolio. The hedge fund held some 3.9 million shares before disposing them all last quarter. MRVL was attractive given its strong balance sheet with no long-term debt and a high free cash flow yield of 8.1%. Plus, the stock offered a dividend yield of 2.2% on a payout ratio of 31%. For a long time, it had been one of the chip sector darlings of hedge fund managers. However, the stock was battered late last year as a U.S. judge imposed on the company a $1.1 billion penalty due to its infringement of two patents held by Carnegie Mellon University. Billionaire hedge fund manager David Einhorn (check out his picks), who boosted his share ownership in MRVL by 58% last quarter as MRVL prices were plunging, downplayed the ruling and expressed his belief that the fine would be “substantially reduced or eliminated.” Then, there is also MRVL’s growth potential. Despite the declining PC market, MRVL was able to grow its EPS at a CAGR of 10.6% over the past five years. The company is now increasing its focus on growth businesses, including the storage and smartphone markets, which should bolster future sales and EPS growth. Einhorn believes the stock’s valuation does not reflect this product transition, which thus represents a potential upside. Tepper did not share this optimism last quarter.
International Paper Company (NYSE:IP), a market leader in paper and packaging, was also removed from Appaloosa’s portfolio in the fourth quarter. The hedge fund had some 243,000 shares. IP pays a dividend yield of 2.6% on a payout ratio of 31%. While the company grew its dividends at a CAGR of 2.4% over the past five years, its last dividend hike of 14% was well above that long-term average. Despite Tepper’s decision to unload the hedge fund’s IP shares, IP’s growth prospects and thus its upside potential look strong. IP’s EPS saw notable estimate revisions over the past three months, and analysts now expect the company to achieve an EPS CAGR of nearly 24% for the next five years. The driver of robust demand for packaging will be the surging e-commerce sales at places like Amazon.com (AMZN) and a robustly-growing industrial packaging market. Growth will also be driven by mergers and acquisitions and emerging markets expansions. The company has been a strong cash flow generator, achieving record operating cash flow last year. It is also inclined to boost its dividend by 50% over the next two-to-three years. The stock is also priced at 12.2x forward earnings, below the paper industry multiple of 13.5x.
Macy’s, Inc. (NYSE:M), one of the largest U.S. department store retailers, was also dumped by Tepper’s Appaloosa last quarter. The hedge fund held a relatively small stake in Macy’s totaling some 103,000 shares. Tepper’s decision may have been influenced by the decelerating pace of same-store sales growth at Macy’s. However, while the department store retailer’s same-store sales are not as brisk as they were a few years back, they are still growing faster than the overall economy. Analysts forecast a robust pace of EPS growth for Macy’s for the next five years, with the company’s EPS CAGR forecasted at 10.7%. Tepper’s decision to dump Macy’s shares last quarter does not seem consistent with his expectations of robust stock market gains this year, as those gains, through a wealth effect, translate into higher consumer spending, with an especially pronounced effect on upscale retailers. With a healthy growth rate, Macy’s valuation makes it a good value. The stock is trading at a forward P/E of 10.7x, below its industry multiple of 14.2x. Still, it should be noted that Macy’s price-to-book is higher than the ratio of its peer group. Macy’s pays a dividend yield of 1.9% on a payout ratio of 21%. Its dividend is up for a new annual increase this month, after being doubled over the past year.
