According to a prominent financial newspaper, about eight in 10 hedge funds have underperformed so far this year. While this may turn some people off on the prospect of considering hedge funds as a viable investment vehicle, outstanding performances by certain funds should be considered, as these select funds manage to vastly outperform stock indices. The 30 mid-cap stocks that these overperfoming hedge funds had selected went on to generate a return of 18% in the 12 months ending November 21, surpassing the S&P 500 Index’s 7.6% return in the same period. And out of 659 hedge funds tracked by Insider Monkey, 627 funds containing at least five long positions in companies valued at $1 billion or more have gained 8.3% in returns on average from their long picks, a full 5.0 percentage above S&P 500 ETF returns.
Billionaire David Tepper’s Appaloosa Management LP is one of those high-performing hedge funds. The employee-owned hedge fund, which moved from New Jersey to the warmer climate (and more lax tax rules) of Florida earlier this year, had an equity portfolio worth $4.40 billion at the end of the third quarter, up from $3.80 billion in the previous quarter. Tepper started Appaloosa in 1993 and became known for investing in distressed companies and generating high returns from them, as well as becoming the highest-paid hedge fund manager in the middle of the financial crisis in 2009. Based on Insider Monkey’s comprehensive back-test, Appaloosa also returned 0.96% per month between 1999 and 2012 from its positions in companies with market cap above $20 billion, compared with S&P 500’s 0.34% a month in the same period, thus beating the index by 0.62 percentage point per month, or 7.44% on an annualized basis. In this article, we are going to take a closer look at some of David Tepper’s best-performing stock picks, which show that imitating his moves can help a retail investor outperform the market and to be better off than investing in an industry- or index-tracking ETF.
Let’s start with Alphabet Inc (NASDAQ:GOOG), the parent company of search engine giant Google, in which Appaloosa Management has 472,000 class C shares worth $366.88 million as of the end of the third quarter, after having sold 158,000 shares between July and September. Alphabet’s stock hit its all-time high of $813.11 per share on October 24; three days later, the Internet giant revealed third-quarter EPS of $9.06 and revenue at $22.45 billion, both figures easily beating consensus estimates of $8.62 and $13.17 billion. While the core business remains strong, Alphabet’s “moonshot” projects are undergoing changes amid certain challenges. The tech giant recently has turned its self-driving car project into a stand-alone company called Waymo LLC. Alphabet’s stock has grown by more than 4% since the beginning of the year. Among hedge funds tracked by Insider Monkey, 134 held positions in Alphabet Inc. (NASDAQ:GOOG)’s Class C stock at the end of the third quarter, up by six funds over the quarter.
During the third quarter, Appaloosa Management maintained its holding in Williams Partners LP (NYSE:WPZ) at 9.27 million shares, valued at $344.64 million. In November, the natural gas transmission company completed the execution of an agreement with the US affiliates of Total SA (NYSE:TOT) for gas gathering activities in the Barnett Shale that will run through 2029. A month later, Barclays reinstated coverage of the company, assigning an “Equal Weight” rating and a $37 price target. Year-to-date, Williams Partners’ stock has advanced by more than 25%. Among hedge funds tracked by Insider Monkey, 11 funds were long Williams Partners LP (NYSE:WPZ) at the end of September, down from 13 funds a quarter earlier.
Appaloosa Management shed 42,500 shares Allergan plc (NYSE:AGN) during the third quarter, and reported ownership of 1.22 million shares valued at $280.59 million in its latest 13F. For the third quarter, the pharmaceutical company reported revenue and EPS at $3.62 billion and $3.32 respectively, well below consensus estimates, with notable increases in sales of drugs such as Botox and Restasis failing to prevent the underperformance. In addition, the drug maker expanded its share buyback plan to $15 billion from $10 billion. After the report, Allergan plc (NYSE:AGN) stock saw price target cuts from Leerink (to $266 from $294), UBS (to $240 from $300), and RBC Capital (to $279 from $300), although the analysts maintained their “Buy” recommendations. Recent news about incoming US President Donald Trump’s plan to crack down on rising drug prices and the US patent regulator’s approval of a request for a review on Restasis’ IP has rocked the drug maker’s stock. Allergan’s stock has plunged by 38% year-to-date, and is recently at record lows not reached since early 2014. A total of 115 investors tracked by Insider Monkey had investments in Allergan plc (NYSE:AGN) at the end of the third quarter, down by 16 funds compared to the end of June.
Similar to what it did to its Allergan holding, Appaloosa Management trimmed its position in Allstate Corp (NYSE:ALL) by 6% to 3.12 million shares worth $215.83 million during the third quarter. On November 28, the insurance company said that it had agreed to buy electronics warranty provider SquareTrade for $1.40 billion adding that the acquisition will remain an independent entity. The stock price fell by about $2 per share the day after the deal was announced, but has rebounded above pre-merger levels about a week after. There were 27 funds in our database bullish on Allstate Corp (NYSE:ALL) at the end of September, versus 29 funds a quarter earlier.
We’ll end the discussion with another tech giant: Facebook Inc. (NASDAQ:FB), which represented a new position in Appaloosa’s 13F portfolio as the fund acquired 1.48 million shares worth $190.43 million between July and September. Facebook’s stock reached an all-time high of $133.28 on October 24, ahead of the company’s earnings report. On November 2, Facebook Inc. (NASDAQ:FB) reported third-quarter revenue of $7.01 billion, which topped expectations by $90 million, and EPS of $1.09, beating the estimates by $0.12. However, the stock plummeted by $7 per share on the back of the results, as investors were disappointed by the company’s guidance of decelerating ad revenue and increased spending for 2017. Most analysts, undaunted by the forecast and maintaining their “Buy” ratings, suggested purchasing Facebook shares amid the recent weakness. Facebook recorded a 15% year-to-date increase in stock value. Among hedge funds tracked by Insider Monkey, 149 had shares in Facebook Inc. (NASDAQ:FB) at the end of the third quarter, up by one fund over the quarter.
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