Billionaire David Tepper is one of the most respected and most followed investors on Wall Street. The co-founder and CEO of Appaloosa, who was one of 2016’s top earning hedge fund managers is known for his investments in distressed debt and out-of-favor companies. In its latest 13F filing, Appaloosa disclosed an equity portfolio worth $7.12 billion as of the end of September, up from $6.74 billion a quarter earlier. During the third quarter, Appaloosa trimmed its equity portfolio, as it reduced its exposure to 28 companies and closed 14 positions. At the same time, the investor raised its stakes in 15 companies and added four new positions.
David Tepper is bullish on the stock market, as he said during an interview on CNBC in August, when he said that, despite some opinions to the contrary, the market is not overvalued and there are plenty of opportunities to invest in. “Look at where multiples and rates were in 1999. I’m not saying stocks are screaming cheap, but you’re nowhere near an overheated market,” Tepper said. He added that global economic growth will increase companies’ earnings and “stocks are relatively cheap to interest rates.” The investor also said that even though higher interest rates could affect the market, the increase would have to be much higher before it does any damage.
One particular sector that Tepper is fond of is technology. According to Appaloosa’s 13F, over 45% of its equity portfolio is allocated towards the tech sector. In the same interview, Tepper explained his fondness for tech stocks, saying that the sector looks cheaper than others and shows low multiples, despite the recent growth. One particular tech stock that Tepper likes is Micron Technology, Inc. (NASDAQ:MU), which represents Appaloosa’s largest position, amassing 9.42% of its total portfolio value.
Tepper added Micron Technology, Inc. (NASDAQ:MU) to Appaloosa’s 13F portfolio during the fourth quarter of 2016 and has been raising the stake every quarter this year. During the first three months of 2017 the position was more than doubled, in the second quarter it was raised by over 90%, and between July and September, the stake was increased by another 32% to 17.05 million shares worth $670.73 million.
The investor’s bullish sentiment towards Micron Technology, Inc. (NASDAQ:MU) is not limited to Appaloosa’s substantial position. Tepper also pitched Micron at the Robin Hood Conference in October, saying that the stock is trading at a forward P/E of 3.8, which is below industry average. At the same time, the company enjoys strong market dynamics as the memory market sees high capital intensity, with $600 million required to increase supply volume by just 1%. At the same time, demand for DRAM is expected to grow at a CAGR of 34% by 2026. The demand for DRAM in the automotive industry is expected to grow at a rate of 64%, while demand from server and cloud segments is projected at 49% CAGR.
While Appaloosa had invested in a number of distressed, or at least troubled, companies during the second quarter, three of the four positions added between July and September were in companies that have advanced since the beginning of the year, while the other position represents ‘Call’ options underlying shares of an ETF. For example, during the second quarter, Appaloosa initiated a stake in Wells Fargo & Co (NYSE:WFC), as the company had been struggling with a scandal regarding unauthorized account openings. In addition, Tepper’s fund initiated stakes in several distressed energy companies, such as Chesapeake Energy Corporation (NYSE:CHK) and Southwestern Energy Company (NYSE:SWN).
Having said that, let’s take a look at David Tepper’s new stock picks.
In Financial Select Sector SPDR Fund (NYSEARCA:XLF), Appaloosa acquired a stake containing ‘Call’ options underlying 8.10 million shares worth $209.57 million. Aside from XLF, the fund’s only other position in an ETF is in PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). Financial Select Sector SPDR Fund (NYSEARCA:XLF) has gained 13% since the beginning of the year, as financial stocks appreciated on the back of potential deregulation and higher interest rates.
So far this year, the Federal Reserve has twice increased the key interest rate, with one more hike anticipated in December. In 2018, the Fed will have new leadership and is projected to increase interest rates four times, in addition to reducing its stockpile of over $4 trillion in US Treasury and mortgage-related bonds. In this way, as the momentum is strong, financial stocks are poised to grow, so Financial Select Sector SPDR Fund (NYSEARCA:XLF), which offers exposure to big banks and other financial companies in the U.S, looks like an attractive bet.
Appaloosa has held shares of Peabody Energy Corporation (NYSE:BTU) since the company emerged from bankruptcy in April, but during the third quarter, the fund also added 301,316 shares of 8.5% preferred convertible class A stock, worth $18.64 million. At the same time, Tepper cut his stake in Peabody Energy Corporation (NYSE:BTU)’s common stock by 78% to 216,536 shares valued at $6.28 million. Aside from Appaloosa, other big investors bullish on Peabody Energy Corporation (NYSE:BTU), include Paul Singer’s Elliott Management and Jon Bauer’s Contrarian Capital Management, which own 21.19 million shares and 4.81 million shares, respectively, as of the end of September.
As stated earlier, Peabody Energy Corporation (NYSE:BTU) emerged from bankruptcy in April and its stock has inched up by 4% since then. The company has improved its balance sheet and has the potential to grow as the coal market stabilizes. Coal companies have seen a decline in the last couple of years, with 26 companies going bankrupt. However, after years of decline, the coal industry around the world seems to be stabilizing. The EIA projects that coal’s market share will be around 29-30% by 2030 as power generation prices grow and emerging markets, such as India, rely more and more on coal for steel production. Peabody Energy Corporation (NYSE:BTU) stands to benefit from these trends in the coal market as it plans to further reduce its debt and focus on high-return investments.
On the next page, we will discuss Appaloosa’s two other new stock picks.
In Applied Materials, Inc. (NASDAQ:AMAT), Appaloosa initiated a $13.02 million stake containing 250,000 shares. The stock of the $62 billion manufacturer of semiconductor and display equipment has surged by more than 78% since the beginning of the year. Applied Materials, Inc. (NASDAQ:AMAT) recently posted its financial results for the fourth quarter of its 2017 fiscal year, which included EPS of $0.93 and revenue of $3.97 billion, both of which beat consensus estimates, by $0.02 and $30 million respectively. For the current quarter, the company is forecasting sales of between $4.00 billion and $4.20 billion and EPS in the range of $0.94 to $1.02, with both projections being above analysts’ expectations. Following strong financial results and solid guidance, KeyBanc increased its price target on Applied Materials, Inc. (NASDAQ:AMAT)’s stock to $67 from $59 and maintained an ‘Overweight’ rating on it, citing strong demand in the semiconductor and display equipment industries in 2018.
The fourth new stock pick in Appaloosa’s equity portfolio is XPO Logistics Inc (NYSE:XPO), in which Tepper’s fund disclosed ownership of 64,311 shares valued at $4.36 million. XPO Logistics Inc (NYSE:XPO) is the largest U.S transportation and logistics company, and one of the top 15 biggest logistics companies in the world in 2017, whose shares have advanced by 77.6% year-to-date, as the company has been well ahead of its 2014 growth plan that targeted $5 billion in revenue by 2017. The company had two major acquisitions in 2015: a majority stake in French logistics company Norbert Dentressangle SA and its $3 billion takeover of trucker company Con-Way Inc. XPO Logistics Inc (NYSE:XPO) plans to make more acquisitions in the near future and to expand into contract logistics. Another fund bullish on XPO Logistics Inc (NYSE:XPO) is David E. Shaw’s D.E. Shaw & Co, which added 628,089 shares to its position during the third quarter to amass 1.95 million shares by the end of September.