6/16/2014 The secret of David Tepper' s 2013 success - MarketWatch

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The secret of David Tepper's 2013 success
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By Meena Krishnamsetty and Matt Doiron
Billionaire David Tepper's hedge fund, Appaloosa Management, reported in a
letter to investors that it returned 16.8%in the first half of 2013, outperforming
the S&P 500. This continues Tepper's record of strong returns for his investors,
with net annualized returns of 28%over the last 20 years. A major contributor to
Appaloosa's outperformance so far in 2013 has traditionally been an industry
hated by investors: legacy airlines. We track quarterly 13F filings from hundreds
of hedge funds , including Appaloosa, as part of our work researching
investment strategies; we have found, for example, that the most popular small
cap stocks among hedge funds earn an average excess return of 18 percentage
points per year (learn more about our small cap strategy) and our own portfolio
based on these techniques has outperformed the S&P 500 by 33 percentage
points in the last 11 months.
According to our database, three of Tepper's 10 largest holdings in his most recent 13F
were legacy airlines. United Continental UAL +0.42% , his second largest 13F position, is up
44% year to date; US Airways has risen 37%; and Delta Air Lines DAL +1.92% has gained
78%. For purposes of comparison, the rest of Appaloosa's top 10 picks from its most
recent 13F, which include Apple AAPL -1.09% and Citigroup C -1.41% , have returned 22% on
average- still better than the S&P 500, but clearly the fund owes a good deal of its
performance to the airlines. Check out the full list of Tepper's stock picks .
One of the reasons why airlines have done well year to date (and in 2012 as well- all three
have at least doubled in price in the last two years) is the expectation that US Airways's
merger with American Airlines will increase industry consolidation, and therefore the pricing
power of the airlines against customers directly and against travel reservation services.
Market sentiment had also been poor toward airlines, leaving them priced cheaply in terms
of attainable earnings goals.
Even with legacy airlines appreciating considerably so far this year, they actually still
generally carry low multiples in terms of their forward earnings estimates. US Airways is
valued at only 6 times consensus earnings for 2014. The company will take on some
integration risk, of course, but that would have to be balanced against the fact that it has
the highest upside from consolidation as it gains market share on many of the routes it
currently shares with American. Its operating income increased by 19% last quarter
compared with the second quarter of 2012, almost entirely due to its success in controlling
costs. Billionaire George Soros 's hedge fund reported a position of 7.8 million shares at
the beginning of April. Randall Smith , Stan Druckenmiller, and Jeffrey Vinik are also
among US Airways investors.
United Continental was unprofitable in Q4 2012 and in the first quarter of this year, but
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6/16/2014 The secret of David Tepper' s 2013 success - MarketWatch
http://www.marketwatch.com/story/the-secret-of-david-teppers-2013-success-2013-08-07 2/4
losses had been smaller than expected before the company turned a profit between April
and June. After adding back special charges it has seen little change in operating income
compared with a year ago, but the sell-side expects the company to improve enough next
year that earnings per share will be $4.72. That is essentially equal to four times what
United Continental earned last quarter, and results in a forward P/E of 7. Ken Heebner 's
Capital Growth Management is another major shareholder in United Continental.
Delta trades at 7 times forward earnings estimates- and, in fact, at only 10 times its trailing
earnings making it an arguable value stock in those terms. Its financials also show an
improvement in terms of costs, aircraft fuel in particular. We wouldn't expect earnings
increases generated primarily by higher margins to be sustainable over the long term, but
as we've seen the airlines are delivering enough earnings at their current run rate that
they really only need to maintain present performance. Billionaire Stanley Druckenmiller
had more than doubled the size of his own position in Delta during the first quarter of the
year.
As a result even with these stocks' strong performance year to date and with the
substantial risk which comes with investing in airlines- all three mentioned here have been
bankrupt at some point- they are still worth considering for a value portfolio. It might be a
bit too risky to concentrate one's portfolio entirely on the industry, but the forward earnings
multiples are certainly low in absolute terms. It will also be interesting to see if Tepper took
profits on any of these positions when Appaloosa releases its next 13F filing later this
month.
Click here to learn more about the Insider Monkey's Hedge Fund Newsletter .
Insider Monkey's small-cap strategy returned 55.6% between September 2012 and July
2013 versus 22.2% for the S&P 500 index. Try it now by clicking the link above.
ADD TO WATCHLIST UAL
United Continental Holdings Inc.
US : U.S.: NYSE
$ 42.78
+0.18 +0.42%
Volume: 10.61M
June 13, 2014 4:01p
P/E Ratio
36.88
Dividend Yield
N/A
Market Cap
$15.98 billion
Rev. per Employee
$439,701
ADD TO WATCHLIST DAL
Delta Air Lines Inc.
US : U.S.: NYSE
$ 39.24
+0.74 +1.92%
Volume: 19.14M
June 13, 2014 4:01p
P/E Ratio
3.09
Dividend Yield
0.61%
Market Cap
$33.27 billion
Rev. per Employee
$489,679
ADD TO WATCHLIST AAPL
Apple Inc.
US : U.S.: Nasdaq
$ 91.28
-1.01 -1.09%
Volume: 53.66M
June 13, 2014 4:00p
P/E Ratio
15.18
Dividend Yield
2.06%
Market Cap
6/16/2014 The secret of David Tepper' s 2013 success - MarketWatch
http://www.marketwatch.com/story/the-secret-of-david-teppers-2013-success-2013-08-07 3/4
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$550.39 billion
Rev. per Employee
$2.19M
ADD TO WATCHLIST C
Citigroup Inc.
US : U.S.: NYSE
$ 47.59
-0.68 -1.41%
Volume: 34.73M
June 13, 2014 4:00p
P/E Ratio
10.89
Dividend Yield
0.08%
Market Cap
$144.57 billion
Rev. per Employee
$364,594
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