In this article we take a look at billionaire David Tepper’s top 10 stock picks.
David Alan Tepper is an American billionaire and hedge fund manager who founded Appaloosa Management in 1993. As of the end of 2020, the hedge fund has $6.7 billion in managed 13F securities.
David Tepper’s Portfolio, His Hedge Fund’s Returns and Performance
As of May 2019, Appaloosa has returned 25% a year since its inception. A report by Bloomberg said that Tepper beat the S&P 500 by about 17 percentage points a year from 1993 to 2014. Even in the midst of the 2008 financial crisis, Tepper fared better than his peers. His fund was down 27%, 10 percentage points better than the S&P 500. He was up 133% at the end of the crisis in 2009, or 106 percentage points more than the market.
Tepper recently said in an interview with CNBC that it’s “very difficult” to be bearish on the market right now. He thinks the Treasury sell-off driving the rates higher is likely behind us. He thinks that the rates should be “more stable” in the next few months. The 63-year-old owner of the Carolina Panthers of the National Football League (NFL) and Charlotte FC in Major League Soccer (MLS) has a total worth of about $14 billion.
From Analyst to Billionaire
Born and raised in Pittsburg, Pennsylvania, Tepper is a football enthusiast from the childhood. He developed an interest in investing while doing his economics degree. His first two small investments, funded by his father, were in Pennsylvania Engineering Co. and Career Academies. Both companies went bankrupt. Tepper graduated with an economics degree from the University of Pittsburgh in 1978. He then received his MBA from Carnegie Mellon University in 1982. In 1985, Tepper joined Goldman Sachs as a credit analyst. Within a few months, he became the head trader in the bankruptcy and special situations department, thanks to his excellent performance. He wanted to become a partner at Goldman, but was rejected twice. This motivated Tepper to launch his own fund. Tepper reportedly bought the beachfront mansion of the former Goldman Sachs supervisor who had rejected him for a promotion and had the house demolished.
David Tepper’s Investment Philosophy: Greedy When Others are Fearful
To use the wise words of legendary investor Warren Buffett, Tepper loves to be “greedy when others are fearful.” After the 1987 market crash, he bought underlying bonds of the financial institutions while everyone exited, and made a fortune for Goldman when the market picked up. In 2001, he posted a whopping 61% return by investing in distressed bonds. He also made huge gains through his risky bets on MCI, Mirant, Conseco and Marconi.
David Tepper’s Speech in Carnegie Mellon University
“My first job application was at McDonald’s. I got turned down. But I did get a job as a short-order cook in a deli. I also sold knives door-to-door, and I was a union worker in a bakery. After high school, I went to the University of Pittsburgh, and worked at the Fine Arts Library, and got honors degree in economics.
After Pitt, I worked at a bank for a little and then came to Carnegie Mellon for my MBA. Even though it was hard work, I actually loved this place. It was the foundation for everything I’ve done professionally since then. This place gave me the tools I needed to be successful. When I graduated, I kind of liked markets and investments, so I tried to get a job with Goldman Sachs, but they rejected me. After I got my MBA, I made an unusual choice at the time. I went to work for Republic Steel. That wasn’t a great time for steel, but I knew I would be exposed to a lot, and I really wanted to learn. About three months after I got to Republic Steel, they gave a 7% across-the-board pay cut. All my business school buddies, all my business school friends, called me and said, “Great choice, Tep!“. In 2 years, Republic Steel had to merge to avoid bankruptcy, but it was a great choice. In those 2 years that they were trying to save the company, Republic did more finance deals than it had in its previous 100-year history. And I learned from each one of them. There’s a lesson here.
In life, get all the experience you can. While you’re young, go for the experience versus a paycheck. That kind of experience got me a job at a mutual fund specializing in distressed companies, and eventually in the door of Goldman Sachs, where in a short time, because of my previous job experience, and cutting-edge-things I learned at CMU, I advanced quickly, and became the head trader at Goldman’s junk desk. That gave me more status than I knew at that time. But what I really wanted was to become a partner. I was up for partner for a few times but never made it. One of the reasons was I had to refuse a powerful partner’s request. The partner had started a new fund to invest in bankrupt companies, and I was supposed to make the trades for him. He was also the partner who controlled our restricted lists. That’s the list of companies where you might have some conflicts or some sensitive information. He asked me to buy a company that he had just removed from the restricted list. That day, it didn’t seem right. In fact, I went to our legal department and told them what was going on. They said it would be okay after a lot of back and forth, but it still didn’t feel right to me. So I refused again. I didn’t get fired, but when I came up for partner, I got shot down. And I was incredibly upset. But you know what? It turned out alright because I didn’t end up a partner at Goldman Sachs, I started my own company 25 years ago, in 1993, called Appaloosa, and ended up doing something that was a lot more fun and made my life better in so many ways.
In life, do what’s right, and it won’t hurt you. Just keep your priorities straight. I keep saying, in life, but as I said before, there are many lives. I’ve had an incredible life from humble beginnings. I’ve raised 3 kids, have a woman I love. I’ve had a successful business career, and incredible philanthropic endeavors. You all have great opportunities ahead. Don’t let anyone tell you different. You live in what was, is, and always will be, the land of opportunity, and the greatest and most generous country in the world. Remember this, when you become successful, remember to give back.”
David Tepper stands out in an industry that is going through rough times. The hedge fund industry is losing ground amid severe losses. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start our list of David Tepper’s top 10 stock picks.
10. Energy Transfer LP (NYSE: ET)
Value: $148,729,000
Percent of David Tepper’s 13F Portfolio: 2.22%
Number of Hedge Fund Holders: 25
Texas-based energy company Energy Transfer operates natural gas midstream, intrastate and interstate transportation and storage assets, LNG and refined product transportation and terminalling assets. Earlier in February, Piper Sandler upgraded the stock to Overweight from Neutral with a $9 price target. The firm said that Energy Transfer stands out in the industry and it is difficult to replicate its advanced technologies and infrastructure used to deliver oil and gas. The firm also said that the company’s $7 billion acquisition of Enable Midstream Partners means the company does not plan any major M&A activity for the next 12-18 months.
With a $148.7 million stake in ET, Appaloosa Management LP owns 24 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 25 hedge funds held stakes in Energy Transfer LP as of the end of the fourth quarter, versus 31 funds in the third quarter.
9. HCA Healthcare, Inc. (NYSE: HCA)
Value: $164,460,000
Percent of David Tepper’s 13F Portfolio: 2.45%
Number of Hedge Fund Holders: 73
Hca Healthcare Inc. ranks 9th on the list of billionaire David Tepper’s top 10 stock picks. The company operates hospitals and related healthcare facilities. The company recently said it plans to buy 80% stake in Brookdale Senior Living (NYSE:BKD) for $400 million. Hca Healthcare stock is up 172% over the last 12 months. Oppenheimer recently assigned a Buy rating for the stock, with a price target of $200.
According to our database, the number of HCA’s long hedge funds positions increased at the end of the fourth quarter of 2020. There were 73 hedge funds that hold a position in HCA Healthcare compared to 71 funds in the third quarter. The biggest stakeholder of the company is Harris Associates, with 9 million shares, worth $1.5 billion.
Bireme Capital, in their Q4 2020 investor letter, said that HCA Healthcare, Inc. (NYSE: HCA)’s stock price is still cheap. Here is what Bireme Capital has to say about HCA Healthcare, Inc. in their Q4 2020 investor letter:
“Since March we have increasingly tilted the long book towards stocks whose businesses will improve as the pandemic fades, a strategy we first discussed in our 1Q20 letter. Now that 2020 is — thankfully — over, let’s take a look back at some of our predictions from Q1.
HCA Healthcare (HCA) runs for-profit hospitals. In Q1, we said:
“We were shocked to see HCA initially trade down more than 50% in mid-March, in line with hotel companies and online travel agents. HCA will likely earn $11-12 in EPS when the COVID-19 crisis recedes, and we think the stock will trade back towards $150. Therefore, during Q1 we added we added ~80% to our shareholdings at an average price of roughly $90.”
If anything, this prediction was pessimistic. Despite the raging pandemic, 2020 revenue of $51.5b was actually up year-over-year. Earnings increased as well, with 2020 EPS of $10.93 and guidance of $12.10-13.10 in EPS for 2021. Said another way, in March HCA was trading for about 5 times 2021 earnings. We think that at $175 this stock is still cheap today and should trade at well over $200 per share.”
8. Twitter, Inc. (NYSE: TWTR)
Value: $257,213,000
Percent of David Tepper’s 13F Portfolio: 3.84%
Number of Hedge Fund Holders: 78
Twitter ranks 8th on the list of billionaire David Tepper’s top 10 stock picks. Twitter’s shares have gained over 200% in value over the last 12 months. Twitter shares rallied in February after the company outlined plans to hit 315 million users and double its annual revenue by the end of 2023. Citi’s Jason Bazinet recently increased his price target for Twitter to $80 from $55, citing the company’s prudent investments in product and acquisitions. The analyst has a Neutral rating on the stock.
As of the end of the fourth quarter, 78 hedge funds in Insider Monkey’s database of 887 funds held stakes in Twitter, compared to 75 funds in the third quarter. SRS Investment Management is the biggest stakeholder in the company, with 7.65 million shares, worth $414.5 million.
GDS Investments, in their Q4 2020 investor letter, mentioned Twitter, Inc. (NYSE: TWTR) and emphasized their views on the company.
Here is what GDS Investments has to say about Twitter, Inc. in their Q4 2020 investor letter:
“GDS Investments’ portfolio still includes Twitter, Inc.. This major participant in the on-line communications space should accelerate its creation of long-term value with user growth, improved monetization per user, and enhanced governance through the stake which Elliot Management and Silverlake Partners now hold. Though the former Tweeter-in-Chief is now silenced on the platform, with Average Revenue per User of approximately $25.00 (but with sizeable opportunities to increase) and recent user growth of more than 29%, the company’s future is bright. The gathering all in one space of leaders from multiple sectors (sports, politics, business, education) allows the company to serve as a hub for information exchange while exploring and realizing its full potential.”
7. Alibaba Group Holding Limited (NYSE: BABA)
Value: $442,187,000
Percent of David Tepper’s 13F Portfolio: 6.61%
Number of Hedge Fund Holders: 156
Billionaire David Tepper’s Appaloosa Management slashed its stake in Alibaba by 15%. Still, the ecommerce company which is under pressure from the Chinese government ranks 7th on the list of the billionaire’s top 10 stock picks, as it entered the first quarter of 2021 with 900,000 BABA shares, worth $442.19 million. Financial Times reported that Alibaba’s UC Browser has been pulled from Chinese app stores. This came just hours after President Xi Jinping during the communist party’s financial advisory committee meeting ordered additional scrutiny and regulations for internet companies.
A total of 156 hedge funds tracked by Insider Monkey were bullish Alibaba at the end of the fourth quarter, down from 166 funds a quarter earlier. BABA ranks 7th in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
Miller Value Partners, in their Q4 2020 Investor Letter, said that Alibaba Group Holding Limited (NYSE: BABA) was a top detractor for their portfolio in the fourth quarter of 2020. Here is what Miller Value Partners has to say about Alibaba Group Holding Limited in their Q4 2020 investor letter:
“Alibaba (BABA) had quite the quarter rising up to a high of $317 in October only to end the quarter down 20% after the delay of the Ant IPO and the announced investigations by the Chinese government into monopolistic practices at the firm. There was additional pressure on the stock as the US House of Representatives passed a bill that threatens to delist Chinese companies from US exchanges unless US regulators are able to inspect their financial audits within three years. During the quarter, the company increased their share buyback program from $6B to $10B. The company report second quarter FY21 results that were largely in-line with expectations. The company reported revs of Rmb155.1B (USD 23.9B) slightly beating consensus of Rmb 153.9B (USD 23.7B) and adjusted EBITDA of Rmb 47.5B (USD 7.3B) versus 41.3B (USD 6.3B). The company maintained full year guidance for revenues of Rmb 650B (USD 100.3B).”
6. Alphabet Inc. (NASDAQ: GOOG)
Value: $445,853,000
Percent of David Tepper’s 13F Portfolio: 6.66%
Number of Hedge Fund Holders: 157
Alphabet ranks 6th on the list of billionaire David Tepper’s top 10 stock picks. Google is one again the target of several US States’ lawsuits. Several states including Texas. Alaska, Florida, Montana and Nevada, are charging Google with anticompetitive practices to expand its presence in the online search and ads market. Alphabet’s fundamentals remain strong. The stock is up 90% over the last 12 months. In 2020, the company’s revenue came in at $182.53 billion, compared to 161.86 billion.
TCI Fund Management is one of the 157 hedge funds tracked by Insider Monkey having stakes in GOOG at the end of the fourth quarter. The fund owns over 2.95 million shares of the company. GOOG ranks 6th in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
Alger Spectra Fund, in their Q4 2020 investor letter, mentioned Alphabet Inc. (NASDAQ: GOOG). Here is what Alger Spectra Fund has to say about Alphabet Inc. in their Q4 2020 investor letter:
“Alphabet is the leading search provider and is a beneficiary of the shift of advertising dollars from traditional mediums like television, radio and newspapers to digital platforms. The company is a leader in implementing artificial intelligence and autonomous vehicles, and it owns the highly popular YouTube property. Despite regulatory scrutiny by the U.S. Department of Justice (DOJ) and state attorneys, Alphabet’s strong quarterly report drove its share price higher. Results of the company’s search service andYouTube strongly exceeded expectations driven by increasing advertising that resulted from a strengthening economy. The revenue acceleration occurred across geographies and in Alphabet’s cloud computing service as well. Earnings exhibited strong operating leverage as costs moved only slightly higher.
Finally, the share price of Alphabet responded favorably to an anti-trust lawsuit filed by the DOJ against the company because
the litigation was more limited in scope than anticipated, primarily alleging that the company has improperly established agreements with various phone makers, including Apple, to ensure that Google isthe default search engine across devices.”
5. PG&E Corporation (NYSE: PCG)
Value: $527,934,000
Percent of David Tepper’s 13F Portfolio: 7.89%
Number of Hedge Fund Holders: 66
PG&E ranks 5th on the list of billionaire David Tepper’s Appaloosa Management’s top picks. However, the fund slashed its stake in the company by 48% in the fourth quarter. PG&E, which is up 63% over the last 12 months, is also on the portfolio of billionaire Dan Loeb.
Around 66 hedge funds tracked by Insider Monkey reported owning stakes in the company at the end of the fourth quarter, down from 76 funds a quarter earlier.
4. Facebook, Inc. (NASDAQ: FB)
Value: $549,325,000
Percent of David Tepper’s 13F Portfolio: 8.21%
Number of Hedge Fund Holders: 242
As of the end of the fourth quarter, there were 242 hedge funds in Insider Monkey’s database that held stakes in Facebook, compared to 230 funds in the third quarter. SB Management, with 12 million shares of FB, is the biggest stakeholder in the company.
3. Micron Technology, Inc. (NASDAQ: MU)
Value: $601,440,000
Percent of David Tepper’s 13F Portfolio: 8.99%
Number of Hedge Fund Holders: 100
Semiconductor company Micron ranks 2nd on the list of billionaire David Tepper’s Appaloosa Management. Micron shares are up 163% over the last 12 months. Micron is ending the development of 3D XPoint memory chips amid a tepid response. Micron recently lifted its profit outlook for fiscal second quarter, citing strong demand and prices in both NAND and DRAM sectors.
As of the end of the fourth quarter, 100 hedge funds in Insider Monkey’s database of 887 funds held stakes in Micron Technology, compared to 79 funds in the third quarter. Arrowstreet Capital is the biggest stakeholder in the company, with 17.5 million shares, worth $1.3 billion. MU ranks 21st in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
In their Q4 2020 investor letter, Bonsai Partners highlighted a few stocks and Micron Technology Inc (NASDAQ:MU) is one of them.
Here is what Bonsai Partners said:
“Micron is a manufacturer of memory semiconductor chips. Micron’s stock appreciated 60.1% during the quarter.
Micron’s shares significantly appreciated this quarter for a couple of reasons. First, and most importantly, the DRAM market appears to have begun its cyclical rebound. As a result, we will likely see higher pricing and profitability through at least the calendar year 2021, hopefully meaningfully longer.
Another (and less meaningful) driver wasthat semiconductor stocks have become ‘en vogue’ once again. I may not be old, but I’ve been around the sector long enough to know that when generalists start getting excited about a ‘new paradigm’ around semiconductors, it’s time to be wary.
I wouldn’t call Micron overvalued, but I’d certainly say it’s more fairly priced today compared to when we first purchased it a few months ago.”
2. Amazon.com, Inc. (NASDAQ: AMZN)
Value: $643,895,000
Percent of David Tepper’s 13F Portfolio: 9.62%
Number of Hedge Fund Holders: 273
David Tepper’s Appaloosa Management increased its hold in Amazon by 40% in the fourth quarter, ending the period with 197,700 shares of the company, worth $643.9 million. According to our database, the number of Amazon’s long hedge funds positions increased at the end of the fourth quarter of 2020. There were 273 hedge funds that hold a position in Amazon compared to 245 funds in the third quarter. The biggest stakeholder of the company is Masayoshi Son’s SB Management, with 2.26 million shares, worth $7.4 billion. AMZN ranks 1st in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
1. T-Mobile US, Inc. (NASDAQ: TMUS)
Value: $661,439,000
Percent of David Tepper’s 13F Portfolio: 9.89%
Number of Hedge Fund Holders: 103
TMUS tops the list of billionaire David Tepper’s Appaloosa Management. The company, through its U.S. subsidiary, plans to offer up to $3 billion of senior notes in three tranches with maturities in 2026, 2029 and 2031. The company announced during its recent investor day presentation that it expects free cash flow growth to support a $60 billion stock buyback program from 2023 to 2025. The company expects FCF of $13 billion to $14 billion in 2023 and $18 billion in 2026.
With a $1.2 billion stake in T-Mobile, Andreas Halvorsen’s Viking Global owns 8.7 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 103 hedge funds held stakes in TMUS as of the end of the fourth quarter, versus 94 funds in the third quarter. TMUS ranks 20th in our list of the 30 Most Popular Stocks Among Hedge Funds: 2020 Q4 Rankings.
Schroder Investment Management said in their letter that they are hopeful for T-Mobile US, Inc. (NASDAQ: TMUS)’s growth. Here is what Schroder Investment Management has to say about T-Mobile US, Inc. in their investor letter:
“T-Mobile US, Inc.’s (“TMUS”) 2020 merger with Sprint Corporation (“Sprint”) was transformational. The company now controls c.45% of low/mid-band spectrum (which is crucial for 5G) but has only 29% of industry subscribers. We expect this gap to narrow over time, via market share gains, while the deal will also generate significant merger synergies; TMUS should, consequently, achieve substantial profits and free cash flow growth over the next 3-4 years.
TMUS has, hitherto, had an inferior network to its peers, and achieved its subscriber growth via very effective marketing and lower prices, encapsulated in its ‘un-carrier’ approach.
In the 5G era, however, it will have a much better network than its peers – as well as lower prices – because it has more of the critical mid-band (2.5GHz) spectrum than AT&T Inc. (“T”) and Verizon Communications Inc. (“VZ”) combined.
The value of this advantage is reflected in the very aggressive C-Band auction currently underway, in which all three companies have likely spent heavily; T and VZ to supplement their holdings of the key enabling asset for the new 5G era, and TMUS to reinforce its advantage and force its peers to leverage up, so they will be less likely to compete on price. The proceeds from this auction have already reached $81bn (and will entail further substantial spending to ready it for use).
Thus, TMUS is targeting the rollout of its 2.5GHz spectrum across 100mn and 200mn POPs by the end of 2020 and 2021 respectively; this will allow it to offer average speeds of 300Mbps (peak speeds >1Gbps) to subscribers (using only 60MHz of the total 160MHz it owns). Its coverage/offer will be far superior to the competition: T’s standard 5G speeds are 40-60Mbps (i.e. barely faster than 4G LTE); VZ’s 5G ultra-wideband network will offer faster speeds (in theory up to multi-Gbps) but currently covers only 2mn POPs, and is difficult to scale because the mmWave spectrum, on which it relies, propagates only over very short distances and is subject to interference (e.g. by foliage).
It is unlikely that the C-band auction will allow T/VZ to rectify their considerable spectrum lag relative to TMUS: 280MHz is being sold, and VZ requires c.190MHz and T c.150MHz to match TMUS. And the spectrum will take considerable time to clear and be deployed (120MHz clears in December 2021 and 160MHz in December 2023). It is also worth noting C-Band is not nearly as good as TMUS’ 2.5GHz – it has weaker propagation characteristics, thus requiring a much denser network grid which is more costly.
We forecast TMUS to grow its market share of subs by only 100bps per annum 2021-2024, i.e. in line with its prior rates, despite having a better network and cheaper pricing than T/VZ. The key risk to this is stronger competition from Dish Network Corp (“Dish”), who must build out a 5G network as part of the TMUS/Sprint merger conditions. However, it will take time for it to truly be a viable competitor (it targets 50% US POP coverage by 2023), and T/VZ likely have more to lose from a new competitor given their higher prices.
The company has guided to $6.7bn of cost synergies over the next 3-4 years. These have so far come in faster than expected, and we feel that TMUS may exceed its guidance (it beat its targets for the MetroPCS acquisition by 40% and achieved them 1 year early). Network costs represent 63% of expected synergies, and these are cost savings from the decommissioning of cell sites, as the company moves from 110K today to 85K over the next few years. Back office and sales and marketing cost saves will yield the rest.
We estimate that costs/sub will drop from their current c.$26 to c.$19 by 2024 (broadly in-line with VZ) helping drive service margins from 40% to 56%, in-line with T but still well below VZ’s 66% (reflecting TMUS’ lower prices). The combination of modest 3-4% per annum revenue growth, high cost take-out, and declining capital intensity should drive normalised FCF/share to c.$16 in 2024 implying a multiple of c.9x. We feel this is attractive given TMUS’s spectrum advantages and its position as the lowest price, i.e. most competitive, service provider.”
You can also take a peek at Michael Burry’s New Stock Picks and Billionaire Jeffrey Talpins’ Top 10 Stock Picks.
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This article is originally published at Insider Monkey.
