Although all eyes have been on the Federal Reserve and its latest monthly inflation report, what could be described as the most important data release of the third quarter happened about six weeks ago.
By August 14, institutional investors with at least $100 million in assets under management must file a Form 13F with the Securities and Exchange Commission. A 13F provides investors with a look over-the-shoulder which stocks the most successful Wall Street money managers bought and sold in the most recent quarter (in this case, the June-ended quarter).
While 13Fs have a notable flaw — they are 45 days old when filed, thus providing stale information for active hedge funds — they can still provide invaluable guidance on stocks, industries, sectors, and trends that Wall ignores. The biggest investment thought on the Street.
In addition to seeing what the most famous investors on Wall Street, such as Warren Buffett, are doing Berkshire HathawayInvestors tend to pay close attention to what billionaire David Tepper and his team have up to Appaloosa. This is because Tepper’s fund has generated a gross annual return of more than 28% over the 30 years from its inception in 1993 to 2023.
Interestingly, Tepper and his team were big equity sellers in the second quarter, with nine positions added, two positions closed, and 26 reduced. Perhaps none of these reductions are superior to artificial intelligence (AI) leaders. Nvidia (NASDAQ: NVDA).
David Tepper is reducing his fund’s stake in AI colossus Nvidia – and probably for good reason
Appaloosa Tepper closed the last quarter of March with 4.42 million Nvidia shares. Between early April and late June, amid Nvidia’s historic 10-to-1 stock split and march to an all-time intraday high of $140.76 per share, Tepper oversaw the disposition of 3.73 million shares, or 84.39% of his fund’s previous shares.
While some of this selling activity is related to locking in profits in an up position substantially starting in the first quarter of 2023, there are several other reasons Tepper and his team could eliminate most of the stake in Nvidia.
For starters, there are good reasons to believe that an AI bubble is being created. None of the companies that were most advanced in technology or innovation in the next 30 years survived the bubble event. With most businesses not having a clear plan to generate positive results from AI investments anytime soon, it seems that investors have, once again, overestimated the uptake and utility of new technologies. If the AI bubble bursts, no company will take it on the chin more than Nvidia.
Tepper and his team at Appaloosa can expect competition to rise in the AI arena. Although Nvidia’s graphics processing units (GPUs) account for about 98% of those shipped in 2022 and 2023 to data centers, external competitors are ramping up AI-GPU production.
Furthermore, all four of Nvidia’s top customers by net sales are working on AI-GPUs for use in data centers. Although Nvidia’s hardware should remain at the cutting edge of computing, the cost and resource advantage of using internally developed chips means that Nvidia will lose orders in the future.
Insider sales are another reason Appaloosa’s brightest investors may be bothering Nvidia. While there are several reasons to sell stocks, some of them superficial, the only reason to buy stocks on the open market is because you think they will go higher. The last time Nvidia insiders bought shares of the company on the open market was December 2020!
The final piece of the puzzle is that David Tepper has traditionally focused on undervalued or distressed assets. Today, the stock market is historically expensive. When equities finally roll over, which happens when valuations increase, companies with high premiums, such as Nvidia, are often the hardest hit.
But even more interesting than billionaire David Tepper spending most of his fund’s stake in Nvidia are the very cheap cyclical stocks he picked to stack in June.
Billionaire David Tepper can’t stop buying these cheap consumer-cycle stocks
Although Tepper and his team added nine positions they held in the second quarter, the most important was the 660,737 shares they bought from China’s No. 2 e-commerce company, JD.com (NASDAQ: JD). This increased Appaloosa’s stock by more than 18% and raised the fund to 4,310,600 shares, which are worth about $116 million, at the time of this writing.
Chinese stocks have really hit a rough patch in the past few years. Provincial lockdowns and strict mitigation measures during the COVID-19 pandemic have caused various supply chain problems for the world’s No. 2 economy.
To add to it, China’s regulatory climate is strict and unpredictable. Even with faster economic growth, investors tend to be wary of paying higher multiples for China-based stocks because of unknown regulations.
However, JD has some long-term catalysts on display, and its stock is very cheap.
The obvious catalyst for JD is that China’s economy usually grows faster than that of developed countries. While the economic ramp-up since the lifting of the COVID-19 restrictions in December 2022 has been disappointing, China’s economy must quickly find its footing.
In this regard, China is still in the early stages of expanding its e-commerce reach to the growing middle class. While e-commerce is a mature concept in the US, it can still provide substantial growth in the world’s No. 2 economy.
On a more company-specific basis, JD appears better equipped to deliver superior long-term margins when compared to China’s leading online retail sales platforms, Alibaba. While the latter generates a lot of revenue from acting as a third-party marketplace, JD operates more richly Amazon. In other words, control the inventory and logistics needed to get the product to the consumer, after it is ordered. Being able to control more aspects of the network should allow JD to outpace Alibaba laterally.
JD also generates enough cash flow and has deep enough pockets to branch out into new ventures. Apart from Logistics operations, it has a Healthcare division, and has invested aggressively in AI to improve various aspects of the company. This includes leaning on AI to make predictions about supply chains and inventory.
Finally, JD is swimming in cash. It closed June with $28.8 billion in cash, cash equivalents, short-term investments, and restricted cash, compared with $8.6 billion in short-term and long-term debt and unsecured senior notes. That’s just over $20 billion in net cash for a company with a $41 billion market cap.
At the closing bell on September 18, JD stock was trading at just 6.5 times consensus earnings per share for 2025 — and that doesn’t account for nearly half of the company’s cash-strapped value. This is an amazing deal that billionaire David Tepper can do.
Should you invest $1,000 in Nvidia right now?
Before buying shares in Nvidia, consider this:
At Motley Fool Stock Advisor The team of analysts only recognized what they believed it to be 10 best stocks to buy investors now… and Nvidia is not one of them. 10 stocks that made the cut could produce monster returns in the coming years.
Try when Nvidia created this list on April 15, 2005… if you invest $1,000 when you recommend, you would have $710,860!*
Stock Advisor gives investors an easy-to-follow blueprint for success, including portfolio-building guidance, regular updates from analysts, and two new stock picks every month. At Stock Advisor service already more than four return of the S&P 500 since 2002*.
View 10 stocks »
* Stock Advisor returns on September 23, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon and JD.com. The Motley Fool has positions and recommends Amazon, Berkshire Hathaway, JD.com, and Nvidia. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
Billionaire David Tepper Sells 84% of Nvidia’s Appaloosa Shares and Pile On Cheap Cyclical Stocks This was originally published by The Motley Fool
