Metlife Inc (NYSE:MET) was one of Appaloosa’s new picks last quarter. The hedge fund purchased nearly 3.4 million MET shares, which were valued at about $112 million at the end of 2012. Recently, we wrote about the stock as one of the bullish bets by billionaire Jim Simons’ RenTech. The insurance provider pays a dividend yield of 1.8% on a payout ratio of only 14%. It beat analyst estimates in each of the past four quarters, with financial performance driven by higher premiums, fees, and net investment income. MET has a high long-term EPS CAGR of 12.2%. The company was one of the four U.S. financial institutions that failed the Fed’s stress test last year. This year, however, Metlife Inc (NYSE:MET) stepped out of the Fed’s oversight as it sold its banking operations to GE Capital. The removal of Fed supervision gives MET more flexibility, improving its competitiveness and the ability to diversify earnings. It also improves the insurer’s flexibility to deploy capital through share buybacks and dividend increases. However, there are speculations that MET may be designated a non-bank systemically important financial institution this year, which will bring it back under the Fed’s regulatory clout, with possible adverse implications due to stringent capital requirements. Metlife Inc (NYSE:MET) is trading at a 30% discount to its book value and a 36% discount to the price-to-book of its peers.
ENSCO PLC (NYSE:ESV), an offshore contract driller, was another Appaloosa’s new pick last quarter. The hedge fund purchased more than 720,000 shares of ESV, valued at nearly $43 million at the end of last year. The purchase was part of the fund’s general interest in the oil and natural gas service sector, including acquisitions of stakes in Transocean (RIG), Weatherford International Ltd. (WFT), and Noble Corp. (NE). ENSCO PLC (NYSE:ESV) pays a dividend yield of 3.3% on a payout ratio of 30%. In February, the company hiked its dividend by 33% to $2.0 annually, citing “a very bullish outlook in terms of customer demand for both deep- and shallow-water offshore markets,” which gives the firm “significant visibility into future cash flows.” Barclays forecasts the record capital spending on oil and natural gas exploration and production in 2013 and believes that the industry is in “a multi-year, double-digit growth spending upcycle internationally.” This bodes well for ENSCO PLC (NYSE:ESV), whose long-term EPS CAGR is forecasted at a robust 27%. The stock is also attractive based on its below-industry price-to-book of 1.2 and a forward P/E of 8.9x.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), the world’s largest publically-traded copper producer, was also a new pick in Appaloosa’s fourth-quarter portfolio. The hedge fund purchased 520,000 shares, valued at nearly $18 million at the end of last year. The company may have been interested as a merger arbitrage play or a value play on the acquisition of McMoRan Exploration (MMR) and Plains Exploration & Production Company (PXP), which marks FCX’s entry into the oil and natural gas exploration and production business. Shareholders generally disapproved this move by Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), considering it too costly, as the company tapped the capital markets to raise $6.5 billion in senior notes through private placements in order to finance the acquisitions. As a result, FCX is trading down 12% since the announcement. While some analysts are upgrading the stock on “strong copper fundamentals,” the outlook for copper prices remains weak, despite some investment banks’ recent increases of their 2013 price projections (see the last-available World Bank’s Commodity Price Forecast Update). Still, FCX appears to be good value, as it is priced at 7.5x forward earnings versus 13.4x for Southern Copper Corp. (SCCO) and 9.4x for Newmont Mining Corp. (NEM). Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) pays a dividend yield of 3.8% on a payout ratio of 28%.
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.
