As you may know, when a large U.S. based investment manager (in excess of $100 million in assets) takes a position, they are required by the Securities and Exchange Commission (SEC) to file a 13F within 45 days of the end of the calendar quarter.
Normally, we would never advise or suggest that a retail investor simply buys whatever large investors are doing, as many have made huge mistakes, such as Bill Ackman and the debacle that is J.C. Penney Company, Inc. JCP.
However, reading the 13F filings can be quite interesting, as it opens the door to how sophisticated investors are thinking, and perhaps gives one a spark of an idea.
One of the top hedge fund managers is David Tepper, who founded Appaloosa Management LP. He has been extremely smart in his calls for many years. Looking at some of his stock picks, we found a few that peaked our interest.
In particular, Tepper made new purchases during the quarter which ended June 30, 2013, in Hertz Global Holdings Inc. HTZ. Most of you will know Hertz, the car rental company. What you might not know is that even after the strong run the stock has had, it still trades at an attractive valuation.
The company reported extremely strong financial results in their latest quarter. Revenue during the second quarter was $2.7 billion, up 22% year-over-year, and a new record for the company. Hertz also reported record second quarter GAAP pre-tax profit during the second quarter of $211.9 million, up 33.5% year-over-year.
While the stock has moved up over the past year, up 67.8%, it trades at a forward P/E ratio of just 9.8 times, using the average estimate of $2.44 EPS for fiscal 2014. The average analyst estimate for fiscal 2013 is for the company to earn $1.89 per share, giving a P/E of 12.6. These are quite reasonable valuation levels for a company that is able to generate strong revenue and earnings gains.
In addition to Tepper accumulating a stake in the company, we just witnessed heavy option activity in Hertz. On August 27, there was a large option trade in which approximately 5,000 January 29 calls were purchased and 5,000 January 20 puts were sold.
This is a very bullish bet that the trader is making. Either the stock moves above $29 and they will profit, or if the stock were to drop further, they are willing to pay $20 per share. For those who don't trade options, each contract is for 100 shares. So 5,000 option contracts is converted into 500,000 shares, and if they are exercised at $20, that makes for a $10 million buy.
With the price up so much over the past, we would definitely wait for a pullback before accumulating. Watch the 200 day moving average, as many traders use that as a point of reference. Also note that the large investor is willing to buy shares at $20.
In this economy, it's rare to find such a large company driving both revenue and earnings, so we would suggest keeping Hertz on your watch-list for a possible buy if the stock were to sell-off.
If you would like to know how we would create a trading strategy using companies like Hertz, then check out our Flagship Newsletter or the Aggressive Investor Newsletter. If you would like to know how we would create a trading strategy for ETF's, then check out the ETF Total Return Newsletter.
Or we can teach you in a one-on-one coaching session on how to improve your trading and investing skills.
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By Joel Laceda - August 28, 2013 BehindWallStreet.com
