'Nervous' David Tepper's New Top Holding

GuruFocus.com

David Tepper (Trades, Portfolio), leader of the $20 billion hedge fund Appaloosa Management, told Bloomberg today after the European Central Bank announced it would cut interest rates: "It's the beginning of the end of the bond market rally. We're done."


ECB President Mario Draghi said the bank would also begin buying asset-backed securities and bonds in order to stimulate the economy.

The announcement confirms Tepper's unease with the market and economic growth prospects he discussed in May, when he told attendees at the SALT Investment Conference in Las Vegas: "There are times to make money. This is a time to not lose money. I think it is a nervous time."

Indeed, Tepper's usually bullish buying has tapered. He bought only three new stocks in the second quarter and three in the first quarter, one of which, Facebook (FB), he said was a short-term trade. This compares to 19 new stocks he added to his portfolio in fourth quarter 2013.

Tepper also did some significant rearranging in his portfolio in the second quarter. He cut his previous second-place holding, the S&P SPDR (SPY), by more than 72% to occupy 3.6% of his portfolio from 9.9%, and he no longer reports holding a call on the SPY that spanned 12.4% of his portfolio as his largest position. Tepper also raised his sixth-place long position, American Airlines Group Inc. (AAL), to be his top position at 7% of his portfolio as of the end of the second quarter.

American Airlines Group (AAL)

Tepper's holding history shows an American Airlines position appearing in his portfolio in fourth quarter 2013, but he has held shares of US Airways Group, a company that merged with AMR Corp that quarter to form the new American Airlines, since 2009.

Tepper already has a gain of 51% on his American Airlines position at its share price around $38.81 on Thursday. He has a much larger gain overall, however, considering US Airways stock traded around $3 per share in fourth quarter 2009.

In the second quarter, Tepper increased his stake in American Airlines Group by 35.5% to 11,654,522 shares in total, making it his top holding.

Holding history:

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American Airlines Group is the holding company for American Airlines and US Airways, and hosts a combined 6,700 flights per day to 54 countries. This year it is ranked as the largest airline in the U.S. by number of passengers, fleet size and destinations offered.

The combined companies reported increased revenue passenger miles in July, up 1.1% from last year, as year-to-date revenue passenger miles increased 2% from the same period of 2013. July total passengers also increased 3% from July 2013, and year-to-date passengers increased 2% year over year.

The Fort Worth-based company also reported record GAAP net profit of $1.5 billion for second quarter 2014, a 114% increase from $681 million the previous year. Total revenues also increased by 10.2% to $11.4 billion, driven by a 3.1% increase in total available seat miles and 5.9% increase in consolidated passenger revenue per available seat mile.

American's quarterly one-year revenue and earnings history:

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American Airlines announced in its second quarter results that it would begin focusing on deploying capital to reduce debt, increase pension contributions and return capital to shareholders. The plan is expected to consist of $2.8 billion in debt and aircraft lease prepayments, $1 billion in share repurchases, $6 million in additional pension payments. It will also include the initiation of a $0.10 per-share dividend, the first American has paid since 1980.

As of June 30, American has $10.3 billion in total cash on its balance sheet.

The merger cost the company approximately $1.2 billion, payment of which it will spread over three years. Synergies from the merger are expected to total $1.05 billion in 2015.

American Airlines trades Thursday with a P/E ratio of 10.6, lower than 93% of companies in the Global Airlines industry. Its P/S ratio at 0.5 is lower than 98% of the companies in the industry.

Gurus Jim Chanos (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio) and Steve Mandel (Trades, Portfolio) started position in the stock in the second quarter, while Kyle Bass (Trades, Portfolio) and John Paulson (Trades, Portfolio) sold out.

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This article first appeared on GuruFocus.
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