David Tepper’s Appaloosa Management Sold These 5 Stocks Before Entering 2022

1. Ovintiv Inc. (NYSE:OVV)

Number of hedge fund holders: 44

Shares of Ovintiv Inc. (NYSE:OVV) has been rallying at a robust pace since the beginning of 2021 amid growth in commodity prices. It is a hydrocarbon exploration and production company. Tepper sold its stake in Ovintiv in the December quarter just after initiating a position in the previous quarter.  

In the fourth quarter investor letter, Miller Value Partners, an investment management firm, mentioned a few stocks including Ovintiv Inc. (NYSE:OVV). Here is what  Miller Value Partners stated:

“The outlook for high multiple favorites depends to a great degree on interest rates. Warren Buffett likened interest rates to the force of gravity for asset prices. At current low levels, high valuations on long-duration assets can be justified. If interest rates move up, the adjustment will be painful. Market action early in the new year, with the swift moves up in interest rates and down in the Nasdaq, offers a taste of the medicine.

We underwrite all our names to have sufficient upside even if risk-free rates move up to 3% (a scenario, not a forecast!). As we evaluate the opportunity set, we find more attractive prospects in the classic value names. We often hear that people think value investing is dead, which only strengthens our conviction. Our gross exposure to classic value has risen from 44% a year ago to 62% currently.

One new name that illustrates the potential we see is Ovintiv (OVV), an oil and gas producer. We’ve seen a huge shift in the industry away from growth towards returns on capital, cash generation, and capacity discipline. OVV exemplifies the change.

OVV’s new CEO Brendan McCracken says: “We are at the forefront of driving innovation to produce oil and gas from shale both profitably and sustainably. We will generate superior returns and free cash flow by continuously improving capital efficiency and expanding margins while driving down emissions. We will deliver that value to our shareholders through disciplined capital allocation.”

Based on crude at $65 (well below the current $83.82 as of 1/14/22), the company guides to free cash flow generation of $11B over the next 5 years and $21B in the next 10 years. The company’s market cap is currently $10B and its enterprise value is $16B. It’s returning a significant portion of the capital to shareholders. If crude averages $70 in 2022, the company will return $700M to shareholders (in addition to paying down a significant amount of debt), which implies a yield of 7% at the current $39.53 price. In other words, there’s a good shot the company will return nearly its entire market cap to shareholders over the next 5 years.”

You can also take a look at the Billionaire Ken Griffin Is Loading Up on These 10 Stocks and 10 Best Pharmaceutical Stocks to Buy in 2022.

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