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Holly LaFon
Holly LaFon
Articles (7944) 

David Tepper’s Biggest Increases in His Most Bullish Sector, Financials

Hedge fund billionaire David Tepper once staked 67.5% of his portfolio in financial services stocks close to the height of the financial crisis of 2009. He has since eased off of that concentrated weighting considerably, but it is still his favorite sector below his ETF positions, at 17% of his portfolio.

Tepper is unusually good at reading markets and Fed moves: He made billions rightly guessing that the government would not let major systemic financial institutions fail during the financial crisis. The announcement made today from Federal Reserve Chairman Ben Bernanke that a tapering of the Fed’s QE program was not imminent would be unwelcome news to Tepper. “There better be a true taper, or else you’re back to the second half of ’99,” Tepper said on CNBC’s Squawk Box in May.

As an indicator of Tepper’s credibility with Wall Street, the Dow and S&P 500 surged to historic highs the day of the interview, in which he mentioned, “I’m definitely bullish.”

Tepper’s Appaloosa Management hedge fund has $18 billion in assets and returned 30% in 2012.

In the second quarter, Tepper decreased four of his financial holdings – each at a double-digit profit: AIG (NYSE:AIG), Hartford Financial Services Group (NYSE:HIG), MetLife Inc. (NYSE:MET) and JPMorgan Chase & Co. (NYSE:JPM).

He also bought more shares of four others, where he may see further upside: Citigroup (NYSE:C), Lincoln National Corp. (NYSE:LNC), Prudential Financial Inc. (NYSE:PRU) and Bank of America Corporation (NYSE:BAC).

Citigroup (NYSE:C)

Tepper’s increase to his Citigroup holding was a slight 12.7% in the second quarter, or 1,082,092 shares with an average quarterly price of $48. The buy brought his total position to 9,601,639 shares, or 6.7% of his portfolio. It is his largest financial holding.

Trading history:


Citigroup’s share price has gained 32% in the past 12 months, trading around $52.32 on Thursday.

This means the stock has yet to reach the 50% upside Tepper said he foresaw for the bank in a January interview on Bloomberg:

"You can look at the earnings estimates on Citi, and we think it potentially has 50% upside from here...get Jamie Dimon on the phone, ask him if there's one franchise he'd like to buy in the world... he'll say Citi's foreign business."

Citigroup continues to strengthen since the financial crisis. In the results of a stress test reported Sept. 16, it was found capable of keeping more than the minimum capital requirements in a crisis scenario in which it lost up to $21.2 billion in losses over nine quarters.

In its latest financial results of the second quarter, it reported a Basel I Tier 1 Capital Ratio of 13.3%, based on new U.S. market risk capital rules effective Jan. 1, 2013. In last year’s second quarter the Tier I Capital ratio was 14.46%.

The bank’s net income also jumped 42% year-over-year to $4.2 billion. Revenues, net of interest expense, were up 11% from the previous year, at $20.5 billion.

Track Citigroup’s quarterly revenue and net income for the past five years below:


Citigroup continues to pay a $0.01 dividend – the same payout since the bank reduced it in February 2009 from $11.20 annually in 2008.


Lincoln National Corp. (NYSE:LNC)

Tepper made his second largest financial holding increase by growing his Lincoln National position 46%, or 176,982 shares, which traded at an average quarterly price of $34. He holds 561,665 shares as of the second quarter, placing it at 0.3% of his portfolio.


Lincoln National’s share price has increased 63% to trade around $42.08 on Thursday.

Founded over 100 years ago, Lincoln Financial offers annuities, insurance, savings plans and financial planning services, with $189 billion in assets under management. As a holding company, it operates through a number of subsidiaries.

The company had net income of $317 million, or $1.15 per diluted share in the second quarter, compared to $321 million, or $1.09 per diluted share in the second quarter of 2012. Its revenues increased to $2.999 billion, from $2.898 billion in the prior-year quarter.

Track Lincoln National’s five-year quarterly revenue and net income growth:


A year ago, the company was preparing for a challenging macro environment through “aggressive, proactive steps to control costs, manage capital and returns and make strategic investments to build our businesses,” Lincoln Financial President and CEO Dennis Glass said in a statement at the time.

Such initiatives paid off in the second quarter of 2013. The quarter provided a good demonstration of the various actions we have taken to improve our operating results including product pricing, claims management, risk management and distribution expansion, all of which are reflected in the results,” Glass said.

The company also had an ROE of 12% and a 13% increase in book value per share, excluding accumulated other comprehensive income (AOCI), to $43.21.

Lincoln Financial is buying back shares, in the amount of 4.3 million shares during the quarter and 7.7 million over the first half of the year. Its second quarter-end share count represented a 5% decrease from the same quarter of 2012, due to repurchasing activity of 15.7 million shares.

Track Lincol National’s share count:


Prudential Financial Inc. (NYSE:PRU)

Tepper owns 1,727,081 shares of Prudential Financial after acquiring 872,025 shares in the second quarter when it traded for $65 per share on average. He established the position in the first quarter of this year.


Prudential’s stock price is up 47% year to date. It is around $78.56 on Thursday.

Prudential is a $37 billion market cap financial institution, with more than $1 trillion in assets under management and 137 years in business. On Jan. 2, 2013, it acquired The Hartford’s individual life insurance business.

In the second quarter, each of Prudential’s divisions reported solid earnings, with its U.S. Retirement business soaring to record high earnings due to two market-leading pension risk transfer transactions toward the end of 2012.

Its financial services business suffered an overall net loss of $524 million, or $1.13 per common share, reflecting pre-tax charges related to foreign currency exchange rates, primarily from a change in value of the Japanese yen, of $1.6 billion. It also includes pre-tax charges of $953 million due to changes in the market value of derivatives largely associated with its investment duration management programs.

Prudential’s Financial Services Businesses book value was $33.7 billion, or $71.93 per common share, down from $37.1 billion, or $79.19 per common share, at year-end 2012.

Prudential’s quarterly net income and revenue over the past five years is below:


Bank of America Corporation (NYSE:BAC)

Finally, Tepper’s greatest holding increase was to Bank of America, which he expanded by 155%, purchasing 3,861,599 shares. He had been selling off shares of the holding for the previous three consecutive quarters.


Bank of America’s stock has gained almost 26% since the beginning of the year, and is trading around $14.60 on Thursday.

Bank of America also released its results of the Dodd-Frank mid-cycle stress test this week. The results showed that under a particular adverse economic scenario, in which the bank lost $26.1 billion pre-tax over nine quarters, Bank of America’s Tier 1 Common Capital ratio would decline to 8.4% under the worst-case scenario and 9.2% by June 30, 2015, exceeding regulatory minimums.

In the second quarter, the bank saw a 63% net income increase year over year to $4 billion, or $0.32 per diluted share. Total revenue rose slightly to $7.43 billion from $7.41 billion a year previously. Growth at the bank was driven by increases in net interest income, investment and brokerage income, investment banking fees, equity investment income, sales and trading revenue and credit quality, as well as expense reductions.

Management also continued to strengthen the bank’s capital base, bringing its Basel I Tier 1 Common Capital ratio to 10.83%, up from 10.49% in the first quarter.

Track Bank of America’s five-year quarterly revenue and net income below:


For more on David Tepper, visit his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of David Tepper.

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