David Tepper is the founder of the hedge fund Appaloosa Management. Since it was founded, Tepper has generated enormous returns.
But how did he start? He graduated in Economics from the University of Pittsburgh. Since he was in college, he started developing systems to trade options. His skills first took him to Republic Steel Corp. Finance Department, where he had his first working experience. Then, he moved to Keyston Funds where he worked as a credit analyst. In 1985, he was hired by Goldman Sachs for the new high-yield bond desk. After working for well-known companies, he decided to aggressively trade for his own benefit and that is how he founded Appaloosa with another Goldman Sachs junk-bond trader, Jack Walton.
What is interesting about Tepper? His clever investments. He is rather unique in what he does because he invests in distressed companies. That is, he invests in great but underpriced businesses. And this is what has made its company reach two-digit gains. Distressed investments have made him earn $4 billion in 2009.
Dear reader, you may be asking why I think that is clever. Well, although risky, he has always invested in companies that were in trouble due to a market crash knowing that upon their recover, he would obtain important gains. Of course, he has also made mistakes, for instance when he thought the Russian government would default on its debt and it didn’t but most of his bets turned to be positive.
Tepper’s former colleague, Jonathan Kolatch, explains it quite well: “He takes a macro perspective on something, for instance this European sovereign crisis, which is that ‘it’s not going to be that bad. And then he takes that and applies it to a micro idea, a particular stock, as opposed to saying I’m going to do this with the currency or do this with the interest rate, which is kind of what the macro guys do. He’ll buy these particular three stocks that will reflect this macro idea.”
Now, let’s take a quick glance at Tepper’s top stocks that will give you more reasons why he has a good strategy.
The Mosaic Company: it is engaged in the production and marketing of concentrated phosphate- and potash-based crop nutrients for the agriculture industry and has a few characteristics that make it a good investment, to wit:
· A solid financial position: for almost 50 weeks its shares have traded between $44.86 and $89.24. Their current position is at $53.45. The market limit is $23.87 billion and the P/E ratio 8.74.
· Reasonable debt levels: Mosaic keeps very low levels of debt. In fact the ratio debt – equity is even below the industry´s average.
· Growing revenues: revenues have surpassed the 22.1% industry average. According to the quarter´s report, Mosaic has increased its revenue by 40.9% in relation to that same period of the prior year and net income has gone from $297.70 million to $526.00 million, a 76.7% increase.
· Earnings per share: the increase in net income has also boosted EPS. Now, they are at $6.12
· Return on equity: greatly increased vis-à-vis the same quarter one year prior.
These five properties really make me think I should bet on it.
Exxon Mobil, Hornbeck Offshore, Noble Energy and CVR Energy: these are energy business companies with different sizes and different strengths regarding financial position, EPS, dividend ratio, etc.
Despite their heterogeneity, I think they are worth considering. It is widely known that the energy sector fluctuates and the economic crisis affect it. Nevertheless, the companies that I mention have been able to rebound from critical situations.
What investors should take into account? Price. The energy market crash causes stock volatility but what´s positive about this is that this weakness gives the chance to invest in companies that will probably get back on their feet.
Valero Energy: although extremely affected by the selloff, it is recovering and has good perspectives for the future. Let me tell you why I would initiate a long position in VLO:
* Its operating income has increased in the last year.
* Its output margin was $11.41 per barrel having a $1.84 increase, the highest in 3 years.
* The Gulf Coast USLD has increased 16% as against LLS margins and has reached $11.49.
* The margins on Gulf Coast gasoline went up from $7.97 per barrel in the second quarter 2010, to $10.26 in the same quarter of 2011
* The benchmarks for oil pricing, WTI and Eagle Ford are beneficial to Valero
Western Refining: although it has cons, such as the worst liquidity position in the refining industry, a large debt burden and is sensitive to fluctuations, I would certainly give WR a chance.
To start with, it has increased its share price 5 times, passing from $4 to $21. If the industry is working, WR obtains good results.
Although investors underestimate the company, the refining rally is running and Western refiners are optimistic. It can produce earnings although the price-sale ratio is very low (0.24) and the stock value can go still further.
Google: it is still looking good. It has been growing for four consecutive quarters and has stable margins. Moreover, it is still investing on important areas.
Regardless of a few shortfalls, such as the 2012 closing of Motorola Mobility, Google is going in the right direction.
I think it can keep a 20% growth at stable margins. If it can do it, then shares will soar.
Do you need any further explanation? I think everything has been said. No doubt Tepper’s strategy is really good, and based on the brief descriptions I gave, I would invest in them in the next 72 hours.