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. (NYSE: 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.
Specifically, Tepper made new investments during the quarter that ended on June 30, 2013, in Hertz Global Holdings Inc. (NYSE: HTZ). Many of you are familiar with Hertz, the car rental firm. However, you might not realize that despite the stock’s strong performance, it still offers an appealing 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.
The stock has increased by 67.8% over the past year, yet it has a forward P/E ratio of only 9.8 times, based on the average estimate of $2.44 EPS for fiscal 2014. For fiscal 2013, analysts estimate the company will earn $1.89 per share, resulting in a P/E of 12.6. These valuation levels are quite reasonable for a company that can produce strong revenue and earnings growth.
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. These are rough guidelines to watch over the next few months.
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.
Originally published on BehindWallStreet.com
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