This content is from: Portfolio

The Morning Brief: After a Big 2013, David Tepper’s Palomino Stumbles

Appaloosa Management founder David Tepper’s Palomino Fund posted a gain of 1.92 percent in September, according to HSBC. This pushed up his return for the first nine months to a modest 4.7 percent, well below his historical average net annual return of close to 30 percent. As a result, 2014 is shaping up to be Tepper’s worst year since he lost 3.5 percent in 2011. Palomino was up more than 42 percent last year and more than 29 percent in 2012.

__

Leon Cooperman is still bullish on the stock market. The founder of New York hedge fund firm Omega Advisors told CNBC Thursday morning that the Standard & Poor’s 500 Index is in fair-value territory, which he defines as slightly above 2000 based on a price-to-earnings multiple of around 16 times. “It is no longer cheap,” he said in the interview Thursday morning before the benchmark dropped some 40 points to about 1928. “Bull markets don’t die of old age,” he reminds his viewers, a theme he has emphasized for several years now. He stressed again that recessions usually trigger bear markets and Cooperman is confident there is no recession in the horizon. “I see the economy growing, but at a subpar rate,” he adds.

This is encouraging for his investors. Cooperman’s Omega Overseas fund lost 2.55 percent in September, cutting its gain for the year to just 1.35 percent, according to HSBC. Commenting on the market’s current volatility before Thursday’s huge selloff, Cooperman told his listeners: “I am not surprised to see volatility when the market is in a zone of fair value.” Cooperman is also confident interest rates will rise next year, suggesting that this is a necessary byproduct of a rising stock market. In fact, he says if rates don’t rise it will be a bad macro omen for the overall state of the economy.

__

Carl Icahn is once again turning up the heat on Apple, a popular stock among hedge funds, including a number of Tiger Cubs and Seeds as well as activists such as Greenlight Capital. In an open letter to chief executive Tim Cook, the octogenarian called for the company to accelerate its stock repurchases, stressing his belief that the stock is worth $203 per share. This is double what the shares are currently trading for. However, this time Icahn was careful not to criticize Cook, who has a growing fan base among investors. “Quite to the contrary, we could not be more supportive of you and your team, and of the excellent work being done at Apple, a company that continues to change the world through technological innovation,” Icahn wrote. He says he wrote the letter to communicate two things—to highlight that the market “misunderstands and dramatically undervalues Apple,” and that the company’s excess liquidity provides an opportunity for more share repurchases. Omega’s Leon Cooperman, appearing on CNBC after the letter was made public, said he believes Apple stock is 20 percent undervalued. However, he was reluctant to endorse using Apple’s cash to buy back shares, stressing that the tech businesses can change quickly and needs to reinvest for the future and develop new products. “I’ll let management do the heavy lifting and go along with what they want to do,” adds Cooperman, who currently holds the stock. Asked about Apple’s below-market, average price-to-earnings ratio, Cooperman said: “The market is making a judgment that it doesn’t see what’s behind the iPhone, what’s behind the growth,” adding, that Icahn “has a much higher price objective than I do.”

__

Steven Cohen is planning to reward employees for behaving ethically. According to Bloomberg, some managers and analysts at his family office, Point72 Asset Management, can earn a bonus of as much as 4 percent for adhering to the firm’s compliance policy and ethical standards, contributing to the community and generating strong investment performance, according to the report, citing spokesman Mark Herr. Describing the new program, “Rewarding What Matters,” Herr said: “Are you setting a proper tone and example on compliance and doing the right thing? Are you setting the right tone and doing the right things to develop your analysts?” Herr cited several ways employees can earn a bonus, such as raising issues with compliance, suggesting policy changes and serving on charitable boards.

__

Deutsche Bank initiated coverage of Allergan with a Buy rating and a $215 price target. In a note to clients Thursday, the bank called the company “a best-in-class” specialty-drug company” with an attractive combination of strong and sustainable organic growth, robust balance sheet and interesting pipeline opportunities.” It told clients there are many potential upsides to shares of Allergan, which is facing a hostile takeover offer from Valeant Pharmaceuticals International with the support of activist hedge fund Pershing Square Capital Management. Deutsche Bank cites a possible “smart acquisition” by Allergan, an acquisition of the company by Valeant at current or improved offer terms or an acquisition by another company. Deutsche Bank asserts that Allergan “has a robust balance sheet and significant borrowing capacity to support a meaningful strategic acquisition,” which is not reflected in its target price.

__

Deutsche Bank Thursday also cut its rating on Tiger Cub and Seed favorite TransDigm, a maker of commercial and military aerospace components, from Buy to Hold. It retained its $190 price target, however. In a note to clients, the bank said it believes TransDigm still has one of the best business models in commercial aerospace. “However, in the spirit of staying disciplined on valuation and seeing less favorable aftermarket trends ahead and less optionality on the balance sheet than usual, we downgrade shares,” it added in a note to clients. In the second quarter, the stock was held by nine hedge fund managers with roots to Julian Robertson Jr.’s Tiger Management, up from eight the previous quarter, according to Novus. However, while one manager added to his position in the second quarter, six managers trimmed their stakes, according to Novus.

Related Content