At The Motley Fool, we understand that it often pays to zig when Wall Street zags. Still, that doesn't mean we blithely ignore what leading fund managers are buying and selling. And hedge funds, which aren't always in lockstep with the broader market, can be a particularly valuable source of insight.
Every quarter, fund managers overseeing more than $100 million must disclose their quarter-end holdings publicly by filing Securities and Exchange Commission Form 13F. The form lists all U.S.-traded securities the manager held at the end of the quarter. Although the form doesn't disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light on his or her "long" stock bets. To help us make use of 13F data, we turned to Motley Fool partner AlphaClone, a research and investment-management firm that tracks hedge fund public disclosures and develops investment strategies based on them.
Fourth-quarter 2010 update
David Tepper, known as one of the country's most successful hedge-fund managers, is the president and founder of Appaloosa Management. Tepper is a contrarian investor and has gained significantly from his concentrated positions in distressed debt and equity.
The total market value of Appaloosa Management's disclosed equity holdings for the quarter ended Dec. 31, 2010, was $4.3 billion across 65 holdings. Here's a snapshot of the portfolio's industry allocations.
The fund's 10 largest positions (shares held) and associated changes as of Dec. 31 were:
(NYSE: C)-- increased 129.3%
- Bank of America -- increased 11.5%
(NYSE: PFE)-- no change
(NYSE: HPQ)-- increased 56.9%
(NYSE: WFC)-- increased 16.4%
- Microsoft -- increased 115.7%
(NYSE: IP)-- increased 178.6%
(Nasdaq: MU)-- new
- Fifth Third Bancorp -- reduced 8.3%
(NYSE: MRK)-- no change
During the quarter, other than the changes in the top 10 holdings, the fund added to its positions in Con-way, Lam Research, Teradyne, and Goodyear Tire and Rubber, among others. On the sell side, the fund reduced its exposure to Strategic Hotels & Resorts, Gramercy Capital, and Willis Holdings. The fund also sold out of eight stocks entirely, including health-care-related Wellpoint, Covidien, and Becton, Dickinson.
Following Tepper's lead
Is it worth paying attention to Appaloosa's fund? According to AlphaClone's back-test simulation, anyone who invested in Appaloosa Management's 10 largest holdings at the time they were disclosed publicly each quarter would have returned 858.7% since 2000, versus 9.4% for the S&P 500 (including dividends) as of March 23. Here's a chart showing AlphaClone's back-test model:
The strategy above buys/sells its holdings each quarter, five trading days after the SEC's filing window for Form 13F closes.
Selected Q4 2010 commentary
Appaloosa Management is heavily into the financial sector with 39% of the portfolio. Technology is the second favorite (24% of assets) while health care constitutes 10% of the total holdings. Here's where the firm is winning and losing currently and making big new bets:
Among the top 10, International Paper and Wells Fargo rose by 26% and 24%, respectively, in the fourth quarter of 2010. Appaloosa increased its positions in both stocks during the quarter.
International Paper is a global paper and packaging company with revenue of $25.2 billion in 2010. The stock has a price-to-earnings ratio of 19 and only a two-star rating (out of five) in Motley Fool CAPS. Wells Fargo is the second-largest U.S. bank by market capitalization at $165 billion. Currently trading around 14 times earnings, Wells Fargo has a three-star rating in Motley Fool CAPS.
Merck, the $100 billion global health care company, was the largest decliner among the top 10, but the stock lost just 1% in the fourth quarter. Merck is a $100 billion market-cap global health care company. The stock has a rating of four stars in Motley Fool CAPS.
Micron Technology is the largest new addition to the portfolio and makes up 3.3% of assets. Micron is a global manufacturer of computer memory technology. In January, Micron bought out Canon's stake in Tech Semiconductor Singapore for $120.6 million and continues to grow aggressively through acquisition. The company is rated four stars (out of five) in Motley Fool CAPS.
So there you have it, the blow by blow of Appaloosa Management's latest moves. Tell us what you think in the comments below.
Company data provide by AlphaClone LLC, a San Francisco-based research and investment management firm that tracks hedge fund public disclosures. For more information on the firm's investment approach, click here to visit AlphaClone.
Important disclosures for back-test performance results
Back-testing is the process of evaluating a core strategy by applying it to historical data. Back-tested performance results are provided for purposes of illustrating historical performance had a core strategy been available during the relevant period. Back-tested performance results are hypothetical and have inherent limitations. AlphaClone makes no representation that any core strategy will achieve performance similar to any back-tested performance results. Actual results could differ materially from back-tested performance and future results could differ materially from back-tested performance. Past performance is no indication or guarantee of future results.
Becton, Covidien, Microsoft, Pfizer, and WellPoint are Motley Fool Inside Value selections. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Bank of America, Gramercy Capital, Microsoft, and Wells Fargo. Through the Rising Star portfolio program, the Fool is also short shares of Bank of America. The Motley Fool has a disclosure policy.