The renowned billionaire hedge fund manager and philanthropist David Tepper‘s Appaloosa Management LP has a diversified equity portfolio and also holds a number of positions in small-cap companies. This article takes a closer look at his top stock picks in the small cap space,including USG Corporation (NYSE:USG), Triumph Group Inc (NYSE:TGI), Axiall Corp (NYSE:AXLL), and Terex Corporation (NYSE:TEX) according to the first quarter 13F filing. The companies belong to the industrials and basic materials sectors, which are up by 10.83% and 10.69% year-to-date, respectively.
Tepper left Goldman Sachs in 1992 to start his own fund with some $57 million dollars. Today the firm has $20.7 billion assets under its management and has delivered about 30% annual compounded return to its investors since inception. Primarily an investor in distressed companies, Tepper came into the spotlight in 2009 when his bets in the distressed financial companies paid off to the tune of $7 billion. On the philanthropic front, Tepper donated $67 billion to Carnegie Mellon University in 2013.
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Appaloosa Management is a fund that we have been following for the last couple of years along with over 700 other investment firms. We follow hedge funds because our research has shown that their stock picks historically managed to generate alpha even though the filings are up to 45 days delayed. We used a 60-day delay in our back tests to be on the safe side and our research showed that the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Total Return Index by an average of 95 basis points per month between 1999 and 2012. After adjusting for risk, our calculations revealed that these stocks’ monthly alpha was 80 basis points. We have also been sharing and tracking the performance of these stocks since the end of August 2012, during which time they have returned 144%, outperforming the S&P 500 ETF by nearly 85 percentage points (see more details here).
USG Corporation (NYSE:USG) represents a new position in Appaloosa’s equity portfolio as the fund acquired some 1.89 million shares of the manufacturer of building materials, valued at $50.54 million. In its financial results for the first quarter, USG Corporation (NYSE:USG) beat the estimates for both earnings and revenues. Although primarily operating in North America, the company is seeking to diversify its activity and has recently formed a joint venture with Boral to reach the markets of Asia and Australasia. USG Corporation (NYSE:USG)’s balance sheet is highly leveraged with a total debt to equity ratio of 549 as compared to the industry’s average of 14.02. The management’s plan is to expand margins to de-lever the company. A few positive trends in that direction include the reduction in SG&A spending for the first quarter and improvement in the price of wallboard for the fourth consecutive year in the midst of a tight leash on costs and increased volumes.
Although down by 5.4% over the year, USG Corporation (NYSE:USG)’s stock has appreciated by 2.75% so far this year. Among other prominent shareholders of the company is the legendary investor Warren Buffett‘s Berkshire Hathaway with some 39 million shares valued at $1.04 billion.
Triumph Group Inc (NYSE:TGI) occupied the second spot on Tepper’s list of small-caps with 832,270 shares valued at $49.70 million. The $3.35 billion company serves the aviation industry by manufacturing, repairing and overhauling a broad portfolio of aero structures and aircraft components. Triumph Group Inc (NYSE:TGI) has been in Tepper’s portfolio since the last quarter of 2013 and its stake was increased by 9% during the January-March quarter. Alexander Roepers‘ Atlantic Investment Management is the largest shareholder of the company, according to our database, with some 4.7 million shares valued at $280.68 million. Triumph Group Inc (NYSE:TGI)’s stock is trading almost sideways year-to-date.
Tepper reduced its stake in Axiall Corp (NYSE:AXLL) by 12% during the first quarter to 992,889 shares valued at $56.61 million. The $2.65 billion manufacturer of chemicals and building products missed both the EPS and revenue estimates for the first quarter and its stock has slid by 11.26% so far this year. Israel Englander is more positive about the company’s prospects as he significantly increased Millennium Management’s position in Axiall Corp (NYSE:AXLL) to 3.02 million shares during the first quarter.
Terex Corporation (NYSE:TEX) is another loser on this list as its stock has slumped by 6.71% year-to-date. In comparison, the farm & construction equipment industry hasn’t gained much this year either and is only up by about 0.39%. Tepper trimmed the exposure of his fund to Terex Corporation (NYSE:TEX) by 2% during the first three months to 1.6 million shares valued at $42.63 million. Richard S. Pzena’s Pzena Investment Management increased its stake to 3.69 million shares valued at $98.13 million during the last quarter.
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