December 2, 2010 / 2:43 PM / 9 years ago

SMART MONEY PROFILE-Will Tepper's golden touch work on tech?

* Last year’s highest-earning fund manager bets on tech

* Bought HP, Cisco in 3rd quarter, added Microsoft shares

* Fund returned 120 pct last year, up 21 pct through Oct

By Emily Chasan

NEW YORK, Dec 2 (Reuters) - Hedge fund manager David Tepper has made several fortunes over the years by buying up distressed debt and shares of near-dead companies. His foray into troubled banks like Citigroup Inc (C.N) and Bank of America (BAC.N) generated a 120 percent return for his fund last year and a $4 billion payday for Tepper.

Now Tepper, who runs the $14 billion New Jersey-based Appaloosa Management LP, is moving into some of the best known and most profitable tech companies in the stock market — Intel Corp (INTC.O), Microsoft Corp (MSFT.O), Cisco Systems Inc (CSCO.O) and Hewlett-Packard Co (HPQ.N).

Financials were about half of Tepper’s portfolio through June of this year, according to regulatory filings. But the latest data filed by Appaloosa showed that by the end of the third quarter, the firm had pared its bet on financials and replaced some of that with tech stocks.

So far, most of Tepper’s moves seem to be paying off. Through October, his flagship Appaloosa Investment fund is up almost 21 percent after fees, making it one of the most successful in a year when competitors have struggled just to stay even.

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In a rare interview on CNBC last month, Tepper said he thought stocks were poised to do well because he expects the economy will either get better on its own or the Federal Reserve will do quantitative easing. Right or wrong, investors paid attention to Tepper’s call, sparking what some called a “Tepper rally” in tech stocks.

Several other top hedge fund managers are getting in on the action as well. A survey of the third-quarter portfolios of the “Smart Money” 30, which includes Tepper’s Appaloosa and other large stock-picking hedge funds, found some of the heaviest buying activity in Hewlett-Packard.

Security software maker McAfee Inc MFE.N, which Tepper did not list owning, was also popular. In August, Intel announced a deal to acquire McAfee for $8 billion, boosting early returns on that pick. [ID:nN19252526]

Data storage provider NetApp (NTAP.O) was the second-largest new position in the quarter for the Smart Money 30. [ID:nN01137766]

Lee Ainslie, who runs Maverick Capital Management, was among the tech buyers. A former technology sector analyst for industry legend Julian Robertson, Ainslie said last month that the group was the cheapest he had seen it in 20 years.

Tepper’s bet on cash-rich tech stocks may seem unlikely for a former Goldman Sachs junk bond trader, but it is not his first venture into the sector. He bought Microsoft, Oracle Corp ORCL.O and Cisco in 2006, and his fund returned 26 percent that year.

STOMACH FOR RISK

Tepper’s background in distressed debt and buying companies out of bankruptcy has given him the stomach for risky bets that other investors avoid. It has also given him a reputation for being ahead of the market and buying into great deals when the crowd is selling.

He bought many of his shares of Citi and Bank of America for pennies and watched them grow into some of his largest holdings.

“He’s an exceptionally astute investor,” said Martin Bienenstock, a bankruptcy attorney at Dewey & LeBoeuf who was on the other side of the table from Tepper in the Delphi bankruptcy case.

“He’s very good at figuring out when debt that seems completely out of the money will actually be in the money for various reasons that other people don’t necessarily see for days, weeks and months, or in some cases years,” Bienenstock said.

Tepper may have already encountered a speed bump with one tech bet, Cisco, which saw a one-day 16 percent plunge on a weaker-than-expected revenue forecast earlier this month. Overall, the stock is down 12 percent since Sept. 30.

By contrast, Microsoft is up 6 percent over the same period.

Appaloosa’s most recent portfolio disclosure filed with U.S. securities regulators, which covers only U.S.-listed equity positions, totaled $3.3 billion, indicating Appaloosa is still largely focused on debt (short positions are not included in the filing).

For example, Appaloosa holds about $2 billion of senior debt in the Stuyvesant Town and Peter Cooper Village apartment complexes in Manhattan, which are going through a restructuring.

Tepper has also bought debt in some of the biggest bankruptcy cases of the past few years, like General Motors (GM.N), Delphi and chemicals maker LyondellBasell (LYB.N).

“I think he still is a distressed debt guy. You can’t change the stripes on the tiger,” said Tom Lauria, head of the restructuring practice at law firm White & Case, who has represented Tepper on bankruptcy deals for years.

“The whole distressed debt business has its genesis in trading in securities that the mass markets don’t understand and don’t want to get involved in, so there are regular opportunities to identify inefficiencies,” Lauria said.

Tepper was the highest paid hedge fund manager in the world in 2009, earning $4 billion, according to an annual ranking in April by industry magazine Absolute Return + Alpha.

The payday even topped the $3.7 billion John Paulson took home in 2007 when he made his famous bet on the subprime housing market collapse.

But you would never know it by talking to Tepper, his friends say. Tepper, a sports fan who owns a minority stake in his hometown Pittsburgh Steelers, is described by his friends as “the billionaire next door.”

“I’m just entirely confident you could bump into Dave Tepper at the CVS shopping for toothpaste and never have any idea who he is,” said Lauria.

“He likes to simplify things, but his mind is like a calculator,” Lauria added. “It feels like he’s always three steps ahead of the rest of the room.”

(Editing by Aaron Pressman and Steve Orlofsky)

((emily.chasan@thomsonreuters.com; +1 646 223 6114; Reuters Messaging: emily.chasan.reuters.com@reuters.net)) Keywords: SMARTMONEY/TEPPER

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