Several major deals highlighted David Tepper’s career before he established his fame by making the all-time record payday of $4 billion investing in near-bankrupt banks in 2009. The distressed debt specialist actually made his all-time record return of 148% back in 2003 and has had a 30% average annualized return since he founded his firm, Appaloosa Management, in 1993.
Tepper primarily specializes in distressed debt investing. He tends to buy distressed debt of companies on the verge of implosion and sells it when it matures. His firm now manages about $4 billion.
Power Companies (2001-2004)
Tepper’s assurance that the government would not let banks fail had at least one precedent. He made a small fortune in 2004 in a similar situation during the California electricity crisis. In 2000 and 2001, large swaths of the state of California faced blackouts and prominent electricity companies went bankrupt. The disaster began when energy companies created an artificial shortage by shutting down power plants for maintenance during times of peak usage. They then increased the price, allowing traders to sell power at significantly higher rates.
The government had also placed a price cap on retail electricity charges, which forced the industry to sell electricity at a loss. Drought and population growth in California exacerbated the situation. Consequently, Pacific Gas and Electric Company (PCG) went bankrupt, and Southern California Edison nearly went bankrupt as well.
The state of California stepped in to save the dying companies, which had together accumulated $20 billion of debt by early 2001 and had their credit ratings reduced to junk status. On January 2001, the state authorized the California Department of Water and Resources to buy power for Southern California Edison, and later it did the same for SDG&E. Companies resumed purchasing their own power in 2003.
David Tepper bought millions of shares of the two most affected power companies, Pacific Gas and Electric and Edison International (EIX), from 2001-2003, mostly when their stock traded in the teens or lower. He sold out of both companies in the beginning of 2004, when their stock had risen to the mid-$20s.
Enron, Worldcom, Conseco Bankruptcies (2002-2004)
In 2002 Tepper purchased at least $1 billion of the $14 billion of distressed debt and securities of one company that went bankrupt in the fallout of the energy crisis – Enron. Enron was accused of gaming the energy market and collapsed due to unethical bookkeeping and other causes.
Another company’s epic bankruptcy that year that paid off for Tepper. Worldcom concealed losses and misled the public about earnings, causing bond investors to lose about $7.6 billion when it defaulted on its debt, which Tepper purchased. “I’m buying a little bit today. It’s a big company with a lot of revenue so we probably will end up making money,” Tepper told the Seattle Times.
Conseco Inc., a U.S. insurance company that filed Chapter 11 bankruptcy in 2003, canceled its stock and gave ownership of the company in large part to bondholders. Tepper bought a large amount of cheap Conseco bonds when it was on the brink of bankruptcy. Conseco emerged from bankruptcy in 2003.
In 2003, Tepper returned 148% and in 2004, he was the second highest paid hedge fund manager, making $510 million, according to Institutional Investor.
Tepper’s seminal trades were made in 2009. Similar to John Paulson, he bought into financials confident that the government would not let the largest banks fail. While banks were teetering on the brink of bankruptcy and the majority of investors were believing the government would nationalize them, Tepper amassed bank-related securities, such as common and preferred shares and junior-subordinated debt.
In the first quarter of 2009, he bought 47.55 million shares of Bank of American at an average price of $6.73 per share. He then decreased his stake steadily as the stock rallied, reaching an average price of $15.79 in the fourth quarter of 2009.
He bought Bank of America preferred shares at 12 cents on the dollar and Citigroup bonds at 19 cents, and other bank debt of Washington Mutual and common and preferred shares of Wachovia, NBC reported. By the end of 2009, the companies’ stocks had recovered and he made billions.
In 2009 he made the highest payday in history of $4 billion, and achieved his second highest return of 132.7%.
With few large companies or sectors going under, Tepper has turned to one of the most distressed industries available – housing. He bought KB Homes (KBH), D.R. Horton Inc. (DHI), Pulte Group Inc. (PHM), Beazer Homes USA Inc. (BZH), Ryland Group Inc. (RYL), and Masco Corp. (MAS) in the first quarter of 2011.
Though none of the companies have balance sheets that forebode bankruptcy and none have announced an intention to, their stocks are cheap. The once-thriving companies now sell in the teens or lower.
Tepper is profiting less from disaster in the first quarter. His top five holdings are Citigroup (C), Prizer Inc. (PFE), Hewlett Packard Co. (HPQ), Bank of America Corp. (BAC), Goodyear Tire & Rubber (GT).