David Tepper, president of hedge fund Appaloosa Management, is a value investor but known for exceptional market timing as well. Therefore, his drastic portfolio changes in the fourth quarter raise questions. Tepper sold out of 26 positions and reduced 9 by more than half. He also bought four new positions and added a great deal of Apple (AAPL). Institutional Investor reports that he was 30 to 40 percent cash in the third quarter, and now he has sold even more of his holdings in the fourth quarter.
Tepper has positioned his portfolio based on his market forecasts before. He accurately predicted that the stock market would rise with the injection of QE2 in 2010. The Federal Reserve would break any fall in the market with QE2, providing an unusually strong safety net.
That year he amassed equities on the reasoning that “if the economy does well, stocks will do well,” he told NBC. His purchases were primarily undervalued large caps such as Hewlett Packard (HPQ) and Cisco (CSCO), pharmaceutical stocks and paper products stocks. The strategy rewarded him with a 22 percent return.
His outlook going into 2011 was less rosy. He believed unemployment would not return to previous levels for 10 or more years, Europe was still rife with uncertainty, and though the market went up, it made him worry that it would go back down. By June 2011, he told CNBC, “We are in a difficult investment environment.” He also said he did not see a QE3 forthcoming.
His second-quarter 2011 filings revealed that he had greatly reduced his market exposure, particularly to financial stocks. In the third quarter he sold completely out of Bank of America (BAC) and Wells Fargo (WFC) and reduced Citigroup (C). The value of his portfolio at the third quarter was $1.5 billion, a mere third of its value six months prior.
Tepper withdrew from the market just in time for the S&P’s 14% decline in the third quarter, its biggest quarterly drop since 2008. He likely foresaw trouble in the markets coming, particularly with turmoil in Europe, which he mentioned on CNBC. Without a QE3, his safety net no longer existed, either.
Now that Tepper is further retreating from the market it could indicate that he is bearish about the market going into 2012. But there are other possibilities.
For instance, Tepper said on CNBC in 2011, “If I got the right things out of Europe I’d really invest more in Spain. But if I don’t get the right things I’m going to get killed there. We buy before we get high fliers.”
Tepper, known for investing in situations so dire other investors won’t touch them (he bought Citigroup for under $1 in 2009), could be waiting for the first sign of a solution in Europe to begin making big purchases amid the carnage there. His only bank stock in his most recent filing is located there, the Royal Bank of Scotland (RBS). He told NBC he was looking for certain things to happen before he invested there, but that essentially it would only take the economy getting better before Ireland, Spain, Portugal and others would be fine.
Additionally, Tepper was at 30 percent cash — a similar amount to now — going into 2009. In March and February of that year, he went on a spending spree in bank stocks, and ended the year with his famous 120 percent return.
The stocks he did buy in the fourth quarter are almost all large positions. The largest, Boston Scientific (BSX), is 5.4 percent of his portfolio. He bought 7,797,503 shares at an average price of $5.50. The stock has declined over 20 percent in the last year and 65 percent over the last five years. The company has had volatile free cash flow over the last ten years and declining annual revenue since 2007. However, it has cut expenses (including jobs), is investing in China, and is launching two dozen new devices in 2012, in an effort to increase earnings by double digits in the next five years. Year to date, the stock is up 12 percent.
His second-largest new buy, Oracle Corp. (ORCL), is now his seventh-largest position, accounting for 4.1 percent of his portfolio. He bought 1,218,526 shares at an average price of $31 per share. Oracle is a stock that GuruFocus author Chuck Carnevale in February called “too cheap to ignore any longer.” It has a P/E ratio of 12.9, low like many of its growing, famous-name peers. It trades for $28 per share, has a $140 billion market cap, and consistent operating results over decades. Recently, it has continued the growth, increasing earnings more than 20 percent per annum since 2008, and has new products it has not yet introduced. Carnevale mentions several other reasons he foresees the dynamic company continuing growth here.
These two new sizable equity investments, in addition to a vast addition of Apple shares, also suggest that Tepper does not see disaster ahead in the U.S. market, but is perhaps preparing for aggressive buying elsewhere.