American International Group Inc (NYSE:AIG) was one of Appaloosa’s big bets during the third quarter, taking a new positon in the insurance company and making up 6.7% of the Appaloosa’s portfolio. AIG managed to post last quarter earnings results of $0.20, compared to $0.77 for the same quarter last year; however, the twenty cents still managed to beat expectations of a $0.07 per share loss handily. With a 12x price to earnings multiple (industry average) on Wall Street’s 2014EPSestimate, AIG’s target price is upwards of $47, which is still below book value and a 23% upside from current trading levels. WhitneyTilsonis also a big fan ofAIG, one of his top five holdings (read more here).
Appaloosa took a new position in Citigroup Inc. (NYSE:C) during the first quarter of 2012, then upped it 50% during the second quarter, making the bank as the fund’s third largest holding. Last quarter the bank began showing improved results, where loans increased 6.5% year over year, and revenues were up 3.3%. The bank also appears cheap, as the average forward price to earnings ratio for the banking industry being around 11x, but Citi trades at 8x. Put that industry average 11x P/E on Citi’s 2013 Wall Street EPS estimate, and Citi undervalued by nearly 15% (see more about why Citi’s a top bank).
Both of Tepper’s major bets on financials, AIG and Citi, still trade below their book values, making them solid investments as investors realize that their respective turnarounds are catching hold.
Betting On Airlines.
United Continental Holdings Inc (NYSE:UAL) was another one of Appaloosa’s big bets during the first quarter of 2012, upping its stake 570%. The fund has kept its stake relatively stable, and still has the airline as its fourth largest holding, making up 4.25% of its portfolio as of the end of 2012. The integration of the Continental merger has left some overhang on the shares, causing the company to trade at only 0.24x sales, compared toDelta’s0.34x. However, the ultimate merger integration will broaden United’s network and lower thecompany’sreturn on the cost of capital. The improved international routes should combine with the major cost and revenue synergies and help expand theairlines’ trading multiples over time, leading to price appreciation.
Don’t be fooled.
All of Tepper’s stocks outlined above still trade at very reasonable PEG ratios, suggesting they are all solid “growth at a reasonable price” opportunities (being below 2.0).
Apple 0.5
Qualcomm 1.4
AIG 0.7
Citi 1.4
United Continental 0.5
This is in part due to all of their relatively cheap valuations and solid expected growth rates.
Apple 19%
Qualcomm 15%
AIG 22%
Citi 12.5%
United Continental 15%
Tepper continues to exert himself as one of the top hedge fund managers, with his fund Appaloosa Management generating average annualized returns of approximately 30% since inception in 1993. His firm has made a couple big bets on the tech industry, Apple and Qualcomm, during 2012, while making money off financials with stakes in AIG and Citi. Meanwhile, Tepper also had a bet on United Continental. It appears all of Tepper’s investments, while helping push the fund higher in 2012, should also be solid investments in 2013.
The article How Did Billionaire David Tepper Make $2.2 Billion In 2012? originally appeared on Fool.com and is written by Marshall Hargrave.
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