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Investment Ideas From Appaloosa Management’s 13F Filing

Thursday - 5/23/2013, 5:04pm  ET

The biggest items in Appaloosa Management’s shopping cart in the latest quarter are Comcast , Transocean , Prudential Financial , and MetLife . The portfolio of this one-time Hedge Fund Firm of the Year based on the latest 13F filing may not necessarily be reflective of its most recent position. By the time the filings reach the SEC, the hedge fund may have already shorted the stocks. Nonetheless, the filings are important in extracting some investment ideas from the smart moves of the firm despite the considerable lag between the filing and the period concerned. What is essential is that the analysis is based on the stocks’ current metrics. I have looked quickly at each from a fundamental lens and see whether or not these are worth the attention they are getting from the known asset manager.

Comcast: The top dividend cable stock

Appaloosa went bullish on Comcast in the first quarter. The position was equivalent to 1.46% of its portfolio. Recently, the cable giant’s EPS remained flat with respect to estimates; its revenue growth decelerated in the past two quarters. Revenue inched only by 2.9% year-on-year in the first quarter, slower than the previous quarter’s 5.95% and about a tenth of the same period last year’s 22.67%. In terms of borrowings, the company’s debt-equity ratio has also recently spiked to 0.98, the highest among quarterly estimates since at least 2008. The stock is priced around 18 times its earnings, which is a bit higher than the industry’s 16.2 (based on Yahoo!).

Nevertheless, the largest cable provider in the U.S. is expected to see its earnings grow by an annual rate of 17% in the next 5 years. Although the outcomes from its acquisition of NBC Universal are yet to be realized, the fact that it is raking $15 billion in revenue per quarter is hard to ignore. Comcast sits on a large amount of free cash flow. And with continuous growth in its core operations, it was able to pay cash dividends. It had recently increased its quarterly payout by 20%. Since 2008, the annualized dividend grew by 36.8% on average. With a payout ratio based on cash flow of only 10.8%, Comcast can promise safe and stable dividend income. Read this article to learn about Comcast’s long-term growth potential.

Transocean: For "wait and see"

Appaloosa purchased an additional 70% of its previous holding in Transocean. After the transaction, the stake was equivalent to 2.82% of the firm's portfolio. Looking at its metrics, Transocean had a relatively better revenue outcome for 2012 compared to 2011. Its net operating cash flow swelled by over 50% in 2012. However, it missed the earnings estimate for the quarter ending in March although earnings are expected to grow by 27.35% annually for the next 5 years. In terms of valuation,'s estimate for 2013 shows that the stock is priced at 12 times its earnings, which is below that of the industry at 17.4 (based on Yahoo!). It has also a PEG ratio of only 0.73.

The Switzerland-based oil drilling company has recently faced considerable pressure from Carl Icahn for the removal of its Chairman and a dividend payout of $4 per share. The Chairman was voted out, but Icahn did not get the dividend decision he wanted. Nevertheless, one of Icahn’s nominees got a seat on the company’s board. Whether or not this will bring a change is something that onlookers can watch out for. I would give it credit for its low valuation and impressive revenue performance in the past year, but one may need to see momentum established before buying.

Prudential Financial: Huge growth potential

Appaloosa also initiated a position in Prudential Financial worth over $50 million or 1.07% of its portfolio. The life insurance company’s core operations continued to make waves in 2012 by achieving a 69% increase in its net operating cash flow, bringing a value that is roughly 4 times the 2009 level. There are reasons to believe this is not short-lived. Recently, it has exceeded earnings estimates by a wide margin of 20% in the quarter ending March 2013. The current outlook also favors Prudential with its June 2013 earnings gaining 9 upward revisions and zero downward revisions. In terms of valuation, data at shows a P/E ratio of only 8.11 for 2013, lower than that for the industry with 15.5 (Yahoo!). Prudential has a price-to-book value of 0.79, which is below the industry’s 0.94. The bulk of the company’s business is international insurance and investments. Its individual life insurance business operates in countries with populations that are quickly aging like Korea and Japan. All these point to an impression that the stock has an undeniable buy and hold appeal.

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