Billionaire David Tepper's Top Stock Picks

 | May 30, 2013 | 6:30 PM EDT
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In mid May, Appaloosa Management -- a hedge fund managed by billionaire David Tepper -- filed its 13F with the SEC. While the information in these filings is a bit old -- this most recent wave discloses many of a manager's long equity positions as of the end of March -- we have actually found that investors can use them to develop investing strategies (for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We can also treat picks from 13Fs as free investment ideas, doing more research on any names which seem interesting. Read on for our take on Tepper's five largest holdings by market value, see the full 13F on the SEC's website, and compare these picks to those in previous filings.

Tepper and his team's largest position was 8.5 million shares of Citigroup (C). The megabank's stock price has risen nearly 90% in the last year, though we still see Citi trading at a discount to the book value of its equity with a P/B ratio of 0.8. We would note that the bank has not done too well in earnings terms on a trailing basis, particularly compared to some of its peers, but Wall Street analysts expect Citigroup to perform in line with its industry going forward and as a result the forward P/E is 9.

Appaloosa counts three airlines among its top ten picks, though the only one to make the top five is United Continental (UAL) with a position of 8.5 million shares as of the beginning of April. The airline industry is consolidating as a consequence of US Airways (LCC) buying American, and some analysts are looking for this to result in higher prices. With the market still being very skeptical of the bankruptcy-prone industry, United Continental is arguably a value play with the stock valued at only 7 times forward earnings estimates. We think that the airlines are worth considering.

The fund cut its stake in Apple (AAPL) by 41% between January and March but still had 540,000 shares in its portfolio according to the filing. Apple currently carries trailing and forward P/E multiples of 11 and 10, respectively; we'd say that with cash accounting for such a large portion of the stock's valuation, the markets are apparently pricing in further declines in the company's earnings. As a result we'd be interested in looking into the chances that Apple can hold its business steady, and would also note that the dividend yield has risen to nearly 3% with the company launching an ambitious repurchasing program as well.

Qualcomm (QCOM) was another of Tepper's top picks with the filing disclosing ownership of almost 3 million shares -- a small increase from three months earlier. We think that Qualcomm is a good candidate for "growth at a reasonable price" status -- while its earnings were down last quarter compared to the same period in the previous fiscal year, this was due to earnings from discontinued operations in the prior period. Earnings from continuing operations were up at a decent rate and the trailing P/E is decent at 18. Analyst expectations of further growth imply a five-year PEG ratio of 0.8.

According to the 13F, Appaloosa owned about 15 million shares of Goodyear Tire & Rubber (GT) at the end of Q1 2013. Goodyear is a somewhat speculative pick: while the sell-side forecasts large increases in earnings per share going forward -- the stock is valued at only 6 times consensus earnings for 2014 -- there are a number of concerns that we'd have to satisfy before buying. The company has substantial pension obligations, for example, and actually experienced a 12% decline in revenue in the first quarter of 2013 versus a year earlier. It's also tied closely to the broader economy with a beta of 2.2.

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