This Investing Legend Just Doubled Down on Tech Stocks

We’re nowhere near an overheated market…

That’s the word from investor David Tepper.

Regular readers know that I like to follow Tepper’s moves in the markets. (For example, read here and here.)

He’s one of the most successful fund managers ever. His fund, Appaloosa Management, has averaged 30% annually over the 24 years that he’s run it.

That record run puts him ahead of legends such as Warren Buffett, Carl Icahn, and David Einhorn.

Tepper’s also great at making large market calls.

In September 2010, he made one of his most famous. He said government intervention in the markets virtually guaranteed that most investments would go up.

He was right.

The market rallied about 30% the following six months. Some people now call it the “Tepper Rally.”

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Here’s why I’m telling you about Tepper today…

The headlines in the financial press are full of doom and gloom. But Tepper is a contrarian, like we are at the Daily. He sees continued growth.

And he’s putting his money where his mouth is…

Earlier this month, Tepper revealed his most recent positions. And he’s doubled down on one sector. I’ll tell you which companies he likes in a moment, but first…

Why Tepper Is Bullish

At the Daily, we pull back the curtain to show you what’s really going on in the markets.

That’s why we share thoughts from successful investors like David Tepper. And right now, Tepper is bullish.

“Because world growth will continue to be good, earnings will be better and stocks are relatively cheap to interest rates,” Tepper told CNBC on August 15.

One metric Tepper uses to value stocks is the forward price-to-earnings (P/E) ratio.

The P/E ratio is what an investor is willing to spend for $1 in current profits. The forward P/E ratio looks at expected earnings over the next 12 months.

Today, the S&P 500 trades at a forward P/E ratio of 17.4.

That isn’t even close to 1999—when internet stocks created the largest stock bubble in U.S. history. The forward P/E ratio then was 27.1—which is 56% higher than today.

“Look at where multiples and rates were in 1999. I’m not saying stocks are screaming cheap, but you’re nowhere near an overheated market,” Tepper said.

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It’s refreshing to hear an expert say this.

Fortunately, you can easily peek into Tepper’s portfolio… and see what he’s buying.

Here’s why…

All funds that have more than $100 million under management must file a quarterly report with the U.S. Securities and Exchange Commission (SEC).

The SEC calls it a 13F filing. It requires large funds to disclose the stocks they own 45 days after every calendar quarter. These reports are public record.

Tepper usually doesn’t publicly discuss his positions. The only time he talks to the media is when his fund releases its 13F report.

That’s why he’s been talking lately. And that’s why we should be looking at his filings now.

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Bullish on Tech Stocks

This past quarter, Tepper increased his position in the technology sector.

He added about 20% to his positions in tech titans Google and Facebook. And he initiated a new position in Alibaba (China’s version of Amazon)—which went from nothing to his third-biggest position this past quarter.

Here’s why he likes these three companies: “The multiples are still low. They just look cheaper than any other part of the market even though they moved.”

We can tell these tech companies are cheap compared to the broad market by using another metric. It’s called the forward P/E-to-growth (PEG) ratio.

Investors like to use this ratio because it controls for growth. A company growing earnings fast should have a higher P/E ratio than one growing earnings slowly.

Based on the PEG ratio, the three companies Tepper is adding to are almost half the price of the overall market.

 

Forward PEG Ratio

S&P 500

2.0

Google

1.2

Alibaba

1.2

Facebook

1.0

Don’t let the hype keep you out of the market.

This titan says tech stocks are cheap and the economy is strong. That combination is the perfect environment for making large gains.

If you’re looking to add new positions, you can start your research with these three stocks.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

IN CASE YOU MISSED IT…

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