Appaloosa LP recently disclosed its portfolio updates for the first quarter of 2020, which ended on March 31.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Founded by David Tepper (Trades, Portfolio) and Jack Walton in 1993, Appaloosa is a New Jersey-based limited partnership hedge fund that specializes in distressed debt. The firm invests in public equity and fixed-income markets around the world and is famous for earning some of the highest returns on Wall Street since its founding. In terms of equity holdings, the firm invests in a small number of companies that are typically large-cap and hold strong competitive advantages.” data-reactid=”13″>Founded by David Tepper (Trades, Portfolio) and Jack Walton in 1993, Appaloosa is a New Jersey-based limited partnership hedge fund that specializes in distressed debt. The firm invests in public equity and fixed-income markets around the world and is famous for earning some of the highest returns on Wall Street since its founding. In terms of equity holdings, the firm invests in a small number of companies that are typically large-cap and hold strong competitive advantages.
Based on its investment criteria, the firm made 13 new buys in the first quarter, sold out of five holdings and reduced or added to its positions in several other stocks for a turnover rate of 16%. The most significant trades were new buys for Twitter Inc. (NYSE:TWTR), Netflix Inc. (NASDAQ:NFLX) and Sprint Corp. (NYSE:S) and the sale of the entire Caesars Entertainment Corp. (NASDAQ:CZR) stock holding.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Twitter” data-reactid=”21″>Twitter
The firm established a new position of 5,530,000 shares in Twitter, impacting the equity portfolio by 4.16%. During the quarter, shares traded for an average price of $32.44.
Twitter is the microblogging social networking platform that was launched by current CEO Jack Dorsey and several business partners in 2006. The company derives the majority of its revenue from selling advertisements to businesses and others, though it has globally banned the promotion of “political content” on its platform.
On May 18, shares of Twitter traded around $29.64 for a market cap of $23.26 billion and a price-earnings ratio of 18.3. According to the Peter Lynch chart, the stock is trading near its fair value.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 3 out of 10. The interest coverage ratio of 1.98 is lower than 95.98% of competitors, but the Alman Z-Score of 3.92 indicates that the company is not likely to face bankruptcy. The operating margin of 10.59% is higher than the industry median of 3.39%, and the return on invested capital is approximately eight times the weighted average cost of capital, indicating profitability.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix” data-reactid=”48″>Netflix
The firm also invested in 255,000 shares of Netflix, which had a 2.93% impact on the equity portfolio. Shares traded for an average price of $353.51 during the quarter.
Founded in 1997 as a DVD mail rental service, Netflix has grown to a media services and production giant. Subscribers can stream the company’s library of content to various devices. Netflix typically acquires new content through licensing or in-house production, and availability can vary by popularity, cost of licensing, seasonality, etc.
On May 18, shares of Netflix traded around $452.58 for a market cap of $199.05 billion and a price-earnings ratio of 91.63. According to the Peter Lynch chart, the stock trades above its intrinsic value but in line with its historical median valuation.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The cash-debt ratio of 0.35 is lower than 66.52% of competitors, but the Altman Z-Score of 5.57 suggests that the company has low bankruptcy risk. The operating margin of 14.5% beats 80.50% of competitors, and the company has grown its revenue and net income significantly in recent years.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Sprint” data-reactid=”79″>Sprint
The firm also bought 6,380,000 shares of Sprint, impacting the equity portfolio by 1.68%. During the quarter, shares traded for an average price of $6.98.
Sprint is a telecommunications company that was previously the fourth largest in the U.S. market. On April 1, the company was acquired by former rival T-Mobile (NASDAQ:TMUS) in a $26 billion all-stock deal after clearing two years’ worth of legal and regulatory hurdles. The combined company plans to leverage its resources to provide 5G to 99% of the U.S. within six years. Sprint is now part of T-Mobile, with each Sprint share being converted to 0.10256 of a T-Mobile share on the day of the merger.
On May 18, shares of T-Mobile traded around $101.90 for a market cap of $125.92 billion and a price-earnings ratio of 25.03. The Peter Lynch chart indicates that this price is above the stock’s intrinsic value but below its median historical valuation.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.03 and Altman Z-Score of 1.77 suggest that the company may need to secure additional liquidity in order to avoid bankruptcy. The operating margin of 12.85% is average for the industry, but the ROIC is higher than the WACC, indicating profitability.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Caesars Entertainment” data-reactid=”106″>Caesars Entertainment
Appaloosa exited its 10,050,000-share stake in Caesars Entertainment, impacting the equity portfolio by -3.47%. Shares traded for an average price of $11.86 during the quarter.
Caesars is a well-known gaming hotel and casino corporation based in Nevada. It operates more than 50 properties and seven golf courses under several brand names. The company still plans to proceed with its previously agreed-upon merger with Eldorado Resorts Inc. (ERI), though the timeline for the closure of the deal has been pushed back to June.
On May 18, shares of Caesars traded around $10.48 for a market cap of $7.17 billion. The price-book ratio of 3.88 indicates the stock could be overvalued, but the price-sales ratio of 0.88 sends the opposite signal.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 4 out of 10. The interest coverage ratio of 0.62 and Alman Z-Score of 0.6 indicate that the company may need to secure additional liquidity in order to avoid bankruptcy. The company has increased its revenue in recent years, though it has more often turned a net loss than a net profit throughout its publicly traded history, recent years included.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Portfolio overview” data-reactid=”146″>Portfolio overview
As of the quarter’s end, Appaloosa held shares in 30 stocks in an equity portfolio valued at $3.27 billion. The top holdings were Amazon.com Inc. (AMZN) with 14.92% of the equity portfolio, Alibaba Group Holding Ltd (BABA) with 13.49% and Alphabet Inc. (GOOG) with 12.85%.
In terms of sector weighting, the firm was most invested in communication services, consumer cyclical and technology.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="This article first appeared on GuruFocus.
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