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David Tepper’s 4 Stocks Trading at Discounts to His Purchase Prices

October 10, 2012 | About:
Holly LaFon

Holly LaFon

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Appaloosa Management, a hedge fund David Tepper founded in 1993, has roughly $12 billion in assets under management. After years as primarily a distressed debt investor, Tepper became prominent in the investing world when he made triple-digit returns during the housing crisis. He is again surpassing peers in 2012, as his Palomina Fund was up 13.3% net of fees in the first half.

Appaloosa prefers to invest in “equities and debt of distressed companies, bonds, exchange warrants, options, futures, notes and junk bonds,” and “typically employs an event-driven investment strategy,” according to Businessweek.

The prices of four of the stocks Tepper bought in the second quarter have since decreased. Most of the companies dipped on connection to weakness in Europe. The companies are: Lam Research (LRCX), Netapp Inc. (NTAP), Celanese Corp. (CE) and MGM Resorts International (MGM).

Lam Research (LRCX)

Tepper bought 435,200 shares of Lam Research at an average of $40 per share in the second quarter. The stock has declined 20% from his average purchase price, 14% year to date and 25% over the last year.

Lam Research supplies wafer fabrication equipment and services to the global semiconductor industry as it increasingly mass produces highly sophisticated devices. It merged in June with Novellus Systems, a stock Tepper once owned but sold out of in 2007. The goal of merging is to “accelerate revenue growth at a faster pace by leveraging our technology adjacencies and complementary experience to more quickly deliver solutions addressing our customers' technology and productivity challenges” and broaden its product portfolio, combined product portfolio and combined resources and greater scale.

Lam Research Corporation has a market cap of $5.72 billion; its shares were traded at around $31.91 with a P/E ratio of 15.6 and P/S ratio of 2.2.

LRCX’s results for the quarter ended June 24, 2012, include 20 days of contributions from Novellus post-merger. The company’s revenue decreased to $741.8 million from $752 million the same quarter the previous year. Net income decreased to $18.1 million, or $0.13 per diluted share, from $125.9 million, or $1.02 per diluted share, the same period the previous year.

The majority of Lam’s revenue comes from Asia, and international sales in Asia and Europe affected the quarter’s results. Revenue in Europe decreased to $244 million from $423 million the previous year, and Asian Pacific revenue declined to $293 million, compared to $492.6 million the previous year.

NetApp Inc. (NTAP)

Tepper purchased 100,000 shares of NetApp at an average price of $40.50 in the first quarter of 2012, and added 675,399 shares at an average price of $35 in the second quarter of 2012. The price declined 19% from his average purchase price, 19% year to date and 23.6% over the last year. The stock traded in a 52-week range of $27.79 to $46.80, falling to lows in the second and third quarter.

NetApp provides storage and data management solutions, with a portfolio of application, virtualization, cloud and service provider solutions. NetApp Inc. has a market cap of $11.11 billion; its shares were traded at around $29.26 with a P/E ratio of 18.4 and P/S ratio of 1.8. NetApp Inc. had an annual average earnings growth of 28.4% over the past 10 years. GuruFocus rated NetApp Inc. the business predictability rank of 4-star.

In the second quarter, when Tepper bought, NetApp forecast revenue below Wall Street’s expectations due to uncertainty in Europe, causing an 18% decline in share price.

NetApp’s stock began to trend up again in August when the company announced its results for the quarter ended July 27, 2012. Revenues totaled $1.5 billion, in line with guidance, almost flat from $1.5 billion for the same period a year ago. Net income was $64 million, or $0.17 per share, down from $140 million, or $0.34 per share, for the same period a year ago.

During the quarter, NetApp released its Data ONTOP, the No. 1 storage operating system, providing a foundation for customers who need an agile data infrastructure, along with several other innovative new products, technologies and programs, and strengthened its relationship with Cisco and Microsoft.

Celanese Corp. (CE)

Tepper bought 150,000 shares of Celanese at an average price of $42 in the second quarter of 2012. The stock has since declined 15% from his average purchase price, 19% year to date and 6% over the last year.

Celanese produces technology and specialty materials for paints and coatings, textiles, auto applications and many other end-use applications.

CE has a market cap of $5.97 billion; its shares were traded at around $35.91 with a P/E ratio of 9.3 and P/S ratio of 0.9. Its PE ratio in the second quarter of 2012 dipped to its lowest level since 2010. The dividend yield of CE stocks is 0.8%.

In the second quarter, when Tepper bought, the company announced first-quarter profits which missed expectations due to challenges in Europe and Asia.

In the third quarter, CE reported a 4% year-over-year net sales decrease of $1.7 billion. Though volumes were high overall, results were pressured by lower pricing, primarily in its Acetyl Intermediates business, and unfavorable currency impacts. The company increased its selling prices for its Acetyl Intermediaries in September. CE is one of the world’s largest producers of acetyl products.

CE expects that the economic climate in Europe and growth rates in Asia will continue through the end of 2012, causing second-half adjusted earnings per share to be slightly lower than the first half of 2012, reflecting typical seasonal trends.

MGM Resorts International (MGM)

Tepper bought 2,002,293 shares of shares of MGM at an average price of $12 in the second quarter. He previously owned a smaller holding of the company at prices above $70. MGM has declined 15% since his most recent purchase, 3% year to date and increased 6% over the last year.

MGM is a hospitality company that owns and operates casino resorts and 51% of MGM China. MGM has a market cap of $5.15 billion; its shares were traded at around $10.17 with and P/S ratio of 0.6.

MGM reported second-quarter revenue of $1.5 billion, flat over the previous year. It also recorded a net loss per share of $0.30, compared to net income of $6.22 the previous year, which included a $6.30 gain per share recognized on the consolidation of MGM China Holdings Ltd. In the second quarter, MGM China’s net revenue increased 6% over the previous year, driven by increases in volume for main floor table games and slots. MGM holds $1.7 billion in cash, down from $1.9 billion at year-end 2011, of which approximately $658 million is related to MGM China. It also has $13.4 billion of indebtedness. Management is focused on improving free cash flow and deleveraging the balance sheet through lowering its cost of capital by refinancing some of its long-term capital at progressively lower rates.

See David Tepper’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of David Tepper.


Rating: 3.1/5 (12 votes)

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