The Billion Dollar Wins You Never Knew Happened

By | September 2, 2016

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Picking market tops and bottoms can be very risky, especially if this contrarian approach goes versus strong and prolonged trends. Here are some bets on not-so-popular assets in the past years that turned out to be huge winners.

David Tepper (Appaloosa Management)

David Tepper is already hailed as the champion of stock market bulls, managing $20 billion in assets and raking in gross returns of nearly 40% on his hedge fund for 2013. For that year, his firm Appaloosa Management took huge positions mostly on US equities, particularly airline stocks.

Earlier that year, US Airways and the bankrupt American Airlines announced an $11 billion merger, which was expected to close in the third quarter. This merger was poised to create the largest air carrier in the country, amounting to nearly 7,000 daily flights to 56 countries. Prior to this, Tepper’s investment team was already crunching the numbers and was able to time its market entry correctly in both US Airways stock and American Airlines debt.

When the merger was made public, Appaloosa Management was already one of the largest stakeholders in US Airways. The stock started off below $6.00 per share in 2012 then closed the year at $13.50 per share, jumping an additional 46.3% right until the merger was announced. As it turns out, Tepper’s fund had already started with a small position on this company way back in the first quarter of 2010, just after the stock bounced up from its recession lows around $2.00 per share.

Appaloosa gradually grew its position on US Airways, from around 2.6 million shares in their initial investment up to 12 million shares in early 2012. At the same time, filings and court documents showed that Appaloosa held $27.2 million in claims versus American Airlines, some of which is tied to equipment and assets. As it turns out, this large debt holding enabled Tepper’s firm to have a say in merger decisions, which eventually turned out to Appaloosa’s advantage.

Larry Robbins (Glenview Capital Management)

Although unpopular with some citizens and investors, Obamacare gave quite the advantage for Glenview Capital Management’s Larry Robbins. Apart from his huge bets on US stocks in 2013, Robbins took positions on shares of companies operating in the US healthcare sector which he believed would certainly benefit from the Affordable Care Act, netting him 38% in gains for his fund that year.

Based on recent filings, Robbins is sitting on $3.2 billion in realized and paper profits on these positions opened four years ago. Obamacare, which was passed in 2010, gave Robbins’ team an opportunity to come up with a strategy to invest in the healthcare industry, which spans not just hospitals but also insurers.

In fact, Glenview Capital Management analysts were already looking into a potential shift in the healthcare industry as early as 2007 as more citizens gained coverage and hospital operators were mulling mergers with insurance companies. Robbins and Glenview partner Randy Simpson already started buying up shares of health insurers back then, which turned out to be a market entry that was too early. Health stocks were dragged down in the financial recession, causing the fund to slip by nearly 50% before the equity market rebounded in late 2009. When the legislation officially passed in 2010, Robbins took this as a sign to revisit their healthcare investment strategy.

Among the first few hospital shares they bought were of HCA Holdings, LifePoint Health, and Community Health Systems, with the healthcare sector accounting for 10% of their fund’s holdings as of 2012. However, Obamacare was thrown a curveball when the US Supreme Court considered the mandate to require most Americans to get health coverage, causing hospital shares to dip on the likelihood that this would certainly be rejected. At that point, Glenview decided to add more healthcare stocks to their portfolio on the dips.

Fortunately, the Supreme Court upheld this mandate, leading Glenview’s flagship fund to reap 44% in profits for 2013. The industry encountered a few more roadblocks soon after, such as the initial flop in the Healthcare.gov website and the low registration numbers, but Robbins and Simpson were determined to look beyond the market noise even as shares dipped again.

In addition, Robbins noticed that the law provided a likely catalyst for mergers, eventually chalking up its latest win on Anthem Inc. which acquired rival Cigna Corp. Glenview also had positions on insurers Aetna and Humana, which struck a $34 billion merger earlier this year and spurred strong stock gains for both companies and of course Robbins’ fund.

Jonathan Gray (Blackstone Group)

Back in 2008, investors were mostly cautious of real estate holdings, still reeling from the onslaught and aftermath of the financial crisis sparked by subprime mortgages. It was around this time that Blackstone Group bought Hilton Worldwide Holdings in a $26 billion leveraged buyout, with the company’s head of real estate Jonathan Gray investing $5.6 billion of the firm’s money in rebooting the hotel company.

At that time, most analysts believed that Blackstone would certainly be dragged in the mud, along with other companies that collapsed due to their investments in the property sector. Even Blackstone partners were worried that they paid too much for the Hilton deal and picked the worst possible moment to enter the market.

Fast forward nearly half a decade later, Hilton went public and eventually chalked up $12 billion in profit for Blackstone in 2014. As it turns out, historically low interest rates offered by the US central bank around the time of the recession were the key to Gray’s success, allowing leveraged buyouts completed in those years to avoid bankruptcy or debt restructuring. In addition, this helped Blackstone fund the purchase of Hilton at easy payment schedules and less restrictive terms.

After the buyout, Gray replaced then Hilton CEO Stephen Bollenbach with Christopher Nassetta, whom he knew since the 90s. Still, their expansion plans proved unable to withstand global market headwinds during the financial crisis, causing Blackstone to pursue debt restructuring negotiations with Hilton creditors. In 2010, Gray was able to get these creditors into a brand-new agreement which involved an additional $819 million in brand-new equity investment into Hilton. It wasn’t until late 2013 that the hotel chain started to regain traction, leading bankers to start working on the company’s IPO prospectus, which eventually paved the way into scoring an equity value of $20 million for Hilton and $9 billion in gains for Blackstone.

 

http://www.forbes.com/sites/nathanvardi/2013/12/12/wall-streets-10-biggest-winners-of-2013/#64bd898f634c

http://www.institutionalinvestorsalpha.com/Article/3157677/Blogs-Portfolio-Watch/Appaloosas-Airline-Bets-Poised-for-Profitable-Landing.html

http://www.wsj.com/articles/fund-bosss-gamble-on-health-law-pays-off-big-1437695522

http://www.bloomberg.com/news/articles/2014-09-11/blackstones-hilton-deal-best-leveraged-buyout-ever

 

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