Many individual investors look to professional hedge-fund managers for ideas on smart stocks to buy. Billionaire hedge-fund manager David Tepper and his Appaloosa Management hedge fund are a frequent source of investment ideas among ordinary investors. In its latest release of its holdings, Appaloosa revealed that it had made some big additions to its positions, including Delta Air Lines (NYSE:DAL), NXP Semiconductor (NASDAQ:NXPI), and Southwest Airlines (NYSE:LUV). Let's look more closely at what motivated these big purchases and whether you should follow Tepper's lead.
Will the skies be friendly for investors?
Two of Tepper's biggest additions during the quarter were in airline stocks. Appaloosa already had a substantial position in Delta Air Lines going into the third quarter, but the hedge fund put a lot more money into the high-flying stock, purchasing an additional 1.8 million shares that were worth about $81 million at quarter-end. Appaloosa's holdings of Southwest Airlines were brand news, with Tepper buying 1.64 million shares that were worth about $62 million by the end of September.
The airline industry has gone through an unprecedented period of profitability in recent years. Trends toward consolidation have reduced capacity and made it easier for airlines like Delta and Southwest to keep their fares relatively high. At the same time, lower fuel costs have made operating costs fall, and airlines have also been in a better financial position to make capital expenditures to buy more efficient aircraft that can reduce ongoing costs even further. That sent share prices soaring, but over the past year, the rise in airline stocks has stalled out, as both Delta and Southwest have largely treaded water since late 2014.
More recently, Delta, Southwest, and other airlines have seen their prospects start to gain altitude once again. In its most recent quarterly release, Delta reported faster growth in earnings resulting from much higher margins, as an ill-timed energy-price hedge finally gave way and allowed the airline to benefit from cheap fuel. Southwest said that it expects its unit revenue will start to grow again beginning in the current quarter, sending its stock price higher by more than 20% and making up for losses earlier in the year. Thanks to new routes, Southwest could see even more growth in the year to come.
Tepper's additions to airline stocks look timed to capitalize on the pause in growth that most airlines struggled through this year. With new upward momentum building, Appaloosa's new investments have a good probability of success.
Looking to connect
Tepper also bought more stock in NXP Semiconductor during the quarter. With Appaloosa buying more than 630,000 shares of NXP, the hedge fund's total position reached nearly 2.3 million shares, and the new stock that Tepper bought was worth about $56 million at quarter-end.
NXP has long been one of the major beneficiaries of the development of mobile payment systems, with its near-field communications technology allowing payment terminals to interact with smartphones and other mobile devices at checkout. Recent concerns about the future health of the mobile-device market amid macroeconomic pressures have weighed on NXP's results and near-term outlook. However, the company just got final approval for its merger with Freescale Semiconductor, with the expectation that the deal will close on December 7. That will widen the combined entity's scope to give NXP a leadership role in automotive semiconductors and general-purpose microcontrollers. With a key role in the fast-growing payment space, NXP should have a promising future if it can developing new competitive advantages.
Tepper's latest buys come amid a general pullback in Appaloosa's total reportable investments. What investors can take from this is that even in a challenging environment, the hedge-fund guru sees promise in these stocks. That makes them worthy of a closer look from individual investors as well.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NXP Semiconductors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.