Bank bet
Tepper’s bet on Citigroup Inc (NYSE:C), making up nearly 8% of the hedge fund’s portfolio, appears to be a solid one as the bank still appears to be undervalued with room to move higher. First-quarter results were positive driven by performance in its securities segment and the North American market; now 2013 revenue is expected to be up 12.9%. Citigroup Inc (NYSE:C)’s P/B ratio still appears to still be well below pre-crisis levels.
Airline bet
United Continental Holdings Inc (NYSE:UAL) accounts for approximately 5.8% of the hedge fund’s portfolio. United Continental Holdings Inc (NYSE:UAL) is the 2010 result of United Air Lines merger with Continental Airlines. The airline saw a 0.1% increase in revenue in 2012, but is expected to see 2.5% growth in 2013. The other key for United is that fuel-expense growth is moderating. Fuel expenses increased some 29% in 2011, but only rose 6% in 2012.
The industry tailwinds for the company relate to an improving economy, which should lead to higher travel. Other tailwinds include capacity cuts across the industry that have taken place during the recession. These capacity cuts should lead to improved industry fundamentals and higher prices.
Part of what United is working toward is differentiation from the other airlines. This includes expanding the services it offers on flights. The airline has installed “Economy Plus” seats in the majority of its plans and it has installed flat-bed seats on more than 180 aircraft. The other initiative for the company is placing Wi-Fi service on its long-route international flights, now available on more than 35 aircraft.
What’s more enticing about the stock is that analysts expect the company to grow EPS at a annualized 61% over the next five years. With a P/E ratio of only 9, that puts United’s PEG ratio at a ultra-low 0.1.
Tech turndown
After a 40% decline in shares owned, Apple Inc. (NASDAQ:AAPL) now makes up the third spot in Appapoloos’a portfolio and accounting for about 5.1% of its portfolio. This comes as revenue growth appears to be slowing for the tech giant. Fiscal 2013 revenue growth is expected to only be up 12% year-over-year after the 45% rise in 2012.
Mobile bet
QUALCOMM, Inc. (NASDAQ:QCOM) is Appapoloosa’s fourth-largest stock holding, making up 4.2% of the funds’ portfolio. Qualcomm focuses on developing products and services based on its advanced wireless broadband technology.
Qualcomm has solid exposure to the 3G wireless and smartphones industry in the emerging markets. Wireless Intelligence believes that more than 1.5 billion 3G subscribers will be added in these regions by 2015.
As well, QUALCOMM, Inc. (NASDAQ:QCOM)’s Snapdragon chipset appears to be gaining popularity, and should give the company an advantage with the growing number of media-focused wireless devices. Qualcomm also has a solid balance sheet, with no long-term debt and some $13.5 billion in cash and short-term investments.
QUALCOMM, Inc. (NASDAQ:QCOM) posted fiscal 2Q EPS of $1.06 versus $0.84 for the same period last year on the back of 24% revenue growth. At the same time, Piper Jaffray maintained its overweight rating and put a $74 price target on the stock, suggesting 21% upside. This comes as Jaffray sees upside for the company related to increases in Chinese smartphone adoption.
Qualcomm also pays a solid dividend yield of 2.2%. Qualcomm has robust hedge fund interest, with some 96 hedge funds long the stock. This includes billionaire Ken Fisher of Fisher Asset Management owning the top position, worth some $598 million (check out Fisher’s small-cap picks).
Tire bet
The Goodyear Tire & Rubber Company (NASDAQ:GT) is Tepper’s fifth-largest stock holding, and makes up approximately 4.1% of the fund’s portfolio. The big positive for the stock is the expected rise in global vehicle production, which will drive tire demand higher. I think this could be a good year for the stock.
The Goodyear Tire & Rubber Company (NASDAQ:GT) is also positioned nicely from a cash flow standpoint, having generated more than $1 billion in cash flow from operations last year and now having a $2.3 billion in cash on hand. What’s more is that the company has no debt maturities until 2014.
As far as top-line growth, Goodyear expects full-year tire unit volume to grow at a low single-digit rate in 2013 driven by the 5% growth in original equipment (tires for new cars) demand in North America. The Goodyear Tire & Rubber Company (NASDAQ:GT) has also guided operating income between $1.4 billion and $1.5 billion, a projected 12% year-over-year increase.
Recent industry news also bodes well for Goodyear. Apollo Tyres has agreed to acquire Cooper Tire at a 40% premium to its previous closing price. This deal will give the Indian company access to the U.S. market, which is the second-largest auto market behind China. We take this as another vote of confidence for the expected rebound in the U.S. auto market. Valuation wise, The Goodyear Tire & Rubber Company (NASDAQ:GT) trades on the cheap side, at only about 0.2 times sales compared to Bridgestone at 0.8 times.
Bottom line
Billionaire David Tepper loves the big bank, Citigroup Inc (NYSE:C); I believe the bank can move higher given the compelling valuation. Meanwhile, Tepper’s small-cap pick, United Continental Holdings Inc (NYSE:UAL), is nicely positioned to move higher due to higher travel. The uncertainty surrounding Apple Inc. (NASDAQ:AAPL) leads me to be cautious on the stock.
Qualcomm is a solid investment given the continued demand for 3G devices from emerging economies. I also believe that The Goodyear Tire & Rubber Company (NASDAQ:GT) is a solid investment due to the expected rise in auto sales (see other stocks Tepper is bullish on).
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of QUALCOMM, Inc. (NASDAQ:QCOM).
The article Why Billionaire David Tepper Is Banking on Flying originally appeared on Fool.com.
Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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