David Tepper of Appaloosa Management, who has the distinction of having Carnegie Mellon’s business school being named after him, is without a doubt an accomplished and respected investor, one that we pay close attention too whenever he makes comments on stocks or the broader market. Such was the case this week when he was interviewed on CNBC, explaining that he is a fundamentalist at heart and that he utilizes that ideology to estimate where the market will go in the future and given that, what measures he would take to profit or at least stay afloat during it.
“When you have world growth that looks like it’s going to be lower than it has been over the next five years, than it has been over the previous five years, that’s kind of like a sea change. I know they were slowing down a little bit, but people really didn’t change to the growth forecasts; now they’re changing to the growth forecasts for the future, and so are we. And that just means to me, when you have low world growth, that just means lower P/E’s,” Tepper said.
Where is the S&P 500 headed?
Given that the growth figures have been revised, earnings forecasts for the S&P 500 have also been revised down, with the annual earnings per share now expected to land somewhere between $117 and $118. Tepper explains that even if we manage to extend that to $120 and attach an earnings multiple of 15, the index should land at $1,800, while a more optimistic forecast with a multiple of 16 and earnings per share of $125 would lead to the index being valued at $2,000. Currently, the index is at $1,961, which is still leaning towards the optimistic side, even after the recent major correction.
Should the stocks be shorted then?
As far as shorting stocks is concerned, Tepper explained that he would refrain from such a strategy. If the Fed doesn’t raise interest rates, that could possibly spark enthusiasm among investors, increasing the demand and driving up the stock prices. Moreover, stocks generally have an upward bias as well. He said that the best stocks right now would be those that do not respond much to market volatility and generally remain flat.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 36 months and outperformed the S&P 500 Index by over 60 percentage points (see the details here).
We decided to look at the three largest new holdings initiated by David Tepper’s Appaloosa Management to see how they have performed in the current volatile market. First on the list is Apple Inc. (NASDAQ:AAPL), as Tepper acquired some 2.52 million shares valued at $315.84 million of the iPhone maker, after notably selling off his entire former position in the stock in the fourth quarter of 2014. Although the stock has faced upheavals during the last month, it is only down by about 4.15% during this period. Another fund that has been along for the bumpy Apple Inc. (NASDAQ:AAPL) ride is Carl Icahn‘s Icahn Capital LP, which is the largest stockholder of the tech giant within our database, holding some 52.76 million shares valued at $6.62 billion. During the interview, Tepper said that Apple is “cheap”, which could indicate he has added to his position further in the third quarter.