Although David Tepper’s Appaloosa fund contains a fairly large number of holdings, the billionaire investor’s portfolio is dominated by a single renewable energy stock.
Constellation Energy (NASDAQ:CEG) makes up 16.1 percent of Tepper’s portfolio and is Appaloosa’s single largest position.
According to the company itself, Constellation Energy produces roughly 10 percent of the clean energy in the United States and is used by the majority of Fortune 100 companies. The company has a generation capacity of 32,400 megawatts. Its energy sources include solar, wind, hydroelectric, nuclear and natural gas.
Why Is Tepper Betting Big on Constellation Energy?
Tepper’s next three largest holdings after Constellation are Alphabet, Amazon and Meta at 14.1, 12.1 and 8.7 percent, respectively.
Given this heavy concentration on tech in the Appaloosa portfolio, Constellation seems an unusual choice for the fund’s top holding. When examining the rest of Tepper’s portfolio, though, the investment begins to make slightly more sense.
With the tech focus that dominates the larger holdings in his portfolio, Tepper clearly believes in the power of innovative technologies to generate growth.
Further down in his holdings, however, are more traditional energy stocks. These include Energy Transfer and Enterprise Products Partners.
Given that Constellation sits at the intersection of innovation and energy, it seems a fairly natural fit for two prongs of Tepper’s investment strategy.
Revenues Up Massively
Constellation Energy has seen its revenues rise fairly rapidly over the past year. In Q3 2022, the company’s operating revenues totaled $6.05 billion, up from $4.41 billion in 2021. Revenues for the fiscal year up to Q3 were $17.11 billion, up from the $14.12 billion reported for the same period in 2021.
Despite this excellent revenue growth, Constellation’s earnings have turned sharply negative. Earnings per share in Q3 were $-0.57, more than $1.30 below the analyst consensus estimate. This significant loss is not, however, expected to be permanent. Analysts still project Constellation Energy to deliver $4.61 per share in the coming year.
Constellation is also expected to see robust earnings growth over the next several years. The 3-5 year CAGR estimate for earnings per share currently stands at 42 percent, a very high rate that would send earnings far above their current levels.
While Constellation may well miss this high threshold, even significantly lower performance would result in much higher earnings and likely support higher share prices.
How High Could CEG Stock Go?
Analysts expect decent returns from Constellation Energy in 2023, though the stock may not outperform the broader market. Fair value for Constellation sits at $99 per share according to analysts, about 13.5 percent above the most recent price of $86.89.
Although Constellation may not see massive gains this year, the stock appears to be an excellent candidate for value investors. At 18.3 times expected earnings, the stock is far from overpriced at the moment.
When taking its long-term earnings growth potential into account, however, Constellation could be an absolute bargain. The price-to-earnings-growth ratio for the coming year is 0.51, indicating a strong potential of undervaluation.
Expected future earnings growth rates are even higher than the projected rate for the next 12 months, indicating that the stock could see attractive returns over the next several years.
Investors should also consider Constellation’s dividends when assessing total potential returns. The stock pays $0.56 per share annually, giving it a yield of 0.65 percent. The company has a very short history of dividend payouts, but future earnings growth could result in dividend increases.
Will CEG Stock Fall?
One of the concerns around Constellation Energy is its reliance on government support to achieve its growth targets.
While this is a problem generally faced by the green energy sector, Constellation could see lower growth if future legislation cuts back on funding for renewable energy goals.
The company also suffers the disadvantage of having slipped into negative earnings territory. While this is not expected to be a long-lived state of affairs, the stock could drop dramatically if the company does not achieve its expected profitability.
Given how large the negative earnings surprise of Q3 was, investors will likely be especially sensitive to underperformance from Constellation in the near future.
Is Constellation Energy Stock a Buy?
Constellation Energy is an attractive stock for multiple reasons. First and foremost, the company seems to be priced very favorably given its potential for future growth. If Constellation continues to grow at the expected rate, the stock could produce market-beating returns over the coming years.
Another point in favor of Constellation is its economic moat in the growing green energy sector. As the largest US green energy producer, the company enjoys advantages of scale that its competitors do not. As the provider for many of America’s largest businesses, it also has a reliable customer base that is unlikely to dwindle anytime soon.
It’s further worth noting that other funds have joined David Tepper in buying Constellation aggressively. Over 80 percent of the company is owned by institutional investors, indicating a high degree of confidence from Wall Street. Institutional inflows have also outpaced outflows by more than six times over the past year.
With all of this said, the company’s recent slide into losses is cause for investor concern. This is far from enough to rule the stock out, but it does make it a somewhat risky proposition. The expected returns that Constellation could generate are fundamentally based on a fairly rapid return to profitability.
Ultimately, Constellation appears to be a good buy for growth and value investors with medium to high risk tolerances. The stock could generate outsized returns, but it also has a decent chance of incurring further losses. If the company performs as expected over the next five years, though, the stock’s rewards would likely more than justify its risks.
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