Although all eyes have seemingly been on the Federal Reserve and monthly inflation reports of late, what can arguably be described as the most important data release of the third quarter occurred roughly six weeks ago.
On Aug. 14, institutional investors with at least $100 million in assets under management were required to file Form 13F with the Securities and Exchange Commission. A 13F provides investors with an over-the-shoulder look of which stocks Wall Street's most-successful money managers purchased and sold in the most recent quarter (in this case, the June-ended quarter).
While 13Fs have their noted flaws -- they're 45 days old when filed, thus providing stale information for active hedge funds -- they can still offer invaluable guidance as to which stocks, industries, sectors, and trends have the undivided attention of Wall Street's greatest investment minds.
Aside from seeing what Wall Street's most-prominent investors has been up to, such as Warren Buffett at Berkshire Hathaway, investors tend to play very close attention to what billionaire David Tepper and his team have been up to at Appaloosa. That's because Tepper's fund has posted a gross annualized return of more than 28% in the 30-year stretch from its inception in 1993 through 2023.
Interestingly, Tepper and his team were big-time net-sellers of equities during the second quarter, with nine positions being added to, two positions completely closed, and 26 reduced. Perhaps none of these reductions stand out more than artificial intelligence (AI) leader Nvidia (NASDAQ: NVDA).
David Tepper slashed his fund's stake in AI colossus Nvidia -- and probably for good reason
Tepper's Appaloosa closed out the March-ended quarter with 4.42 million shares of Nvidia. Between the start of April and the end of June, amid Nvidia's historic 10-for-1 stock split and its march to an all-time intra-day high of $140.76 per share, Tepper oversaw the disposition of 3.73 million shares, or 84.39% of his fund's previous stake.
While some of this selling activity likely had to do with locking in profits on a position that's up substantially since it was initiated in the first quarter of 2023, there are a number of other reasons Tepper and his team likely jettisoned most of their stake in Nvidia.
For starters, there are viable reasons to believe an AI bubble is brewing. No company on the leading edge of a next-big-thing technology or innovation for 30 years has escaped a bubble-bursting event. With most businesses lacking well-defined plans to generate a positive return on their AI investments anytime soon, it looks as if investors have, once again, overestimated the uptake and utility of a new technology. If the AI bubble bursts, no company would take it on the chin more than Nvidia.
Tepper and his team at Appaloosa may also be expecting competition to ramp up in the AI arena. Though Nvidia's graphics processing units (GPUs) accounted for a roughly 98% share of those shipped in 2022 and 2023 to data centers, external competitors are ramping up production of their AI-GPUs.
Furthermore, all four of Nvidia's top customers by net sales are working on AI-GPUs for use in their data centers. Even though Nvidia's hardware should retain is computing superiority, the cost and supply advantage of using internally developed chips means Nvidia is going to lose out on future orders.
Insider selling is yet another reason Appaloosa's brightest investors might be souring on Nvidia. While there are a number of reasons to sell stock, some of which are benign, the only reason to purchase shares on the open market is because you think they'll head higher. The last time an Nvidia insider bought shares of their company's stock on the open market was December 2020!
The final piece of the puzzle is that David Tepper traditionally focuses on undervalued or distressed assets. Right now, the stock market is historically pricey. When equities eventually roll over, which is what happens when valuations become extended, companies with lofty premiums, such as Nvidia, are often hit the hardest.
But what's even more interesting than billionaire David Tepper dumping most of his fund's stake in Nvidia is the exceptionally cheap cyclical stock he chose to pile into during the June-ended quarter.
Billionaire David Tepper can't stop buying this historically cheap consumer cyclical stock
Though Tepper and his team added to nine existing positions in the second quarter, the one that really stands out is the 660,737 shares purchased of China's No. 2 e-commerce company, JD.com (NASDAQ: JD). This increased Appaloosa's stake by a little over 18% and lifted the fund's holding to 4,310,600 shares, which is worth about $116 million, as of this writing.
China stocks have absolutely hit a rough patch over the past couple of years. Stringent provincial lockdowns and mitigation measures during the COVID-19 pandemic resulted in all sorts of supply chain problems for the world's No. 2 economy.
To add, China's regulatory climate is strict and unpredictable. Even with faster economic growth, investors tend to be leery about paying higher multiples for China-based stocks given regulatory unknowns.
Nevertheless, JD has a number of long-term catalysts in its sails, and its stock is jaw-droppingly cheap.
The obvious catalyst for JD is that China's economy usually grows at a faster pace than most developed countries. While the economic ramp-up since COVID-19 restrictions were lifted in December 2022 has been disappointing, the Chinese economy should find its footing relatively soon.
Building on this point, China is still in the relatively early stages of expanding the reach of e-commerce to its burgeoning middle class. Whereas e-commerce is a mature concept in the U.S., it can still offer substantive 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 platform, Alibaba. Whereas the latter generates the bulk of its revenue from acting as a third-party marketplace, JD operates more like Amazon. In other words, it controls the inventory and logistics needed to get products to consumers, once ordered. Being able to control more aspects of its network should allow JD to outpace Alibaba on the margin front.
JD is also generating enough cash flow and has deep enough pockets to branch into new ventures. Aside from its Logistics operations, it has a Health division, and has been aggressively investing in AI to improve various facets of its company. This includes leaning on AI to make predictions about its supply chain and inventory.
Lastly, JD is swimming in cash. It closed out June with $28.8 billion in cash, cash equivalents, short-term investments, and restricted cash, compared to $8.6 billion in short- and long-term debts and unsecured senior notes. That's just over $20 billion in net cash for a company with a $41 billion market cap.
As of the closing bell on Sept. 18, shares of JD were trading at just 6.5 times consensus earnings per share for 2025 -- and this doesn't account for nearly half the company's value being tied up in cash. It's an incredible bargain that billionaire David Tepper is smart to pile into.
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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 in 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 Sold 84% of Appaloosa's Stake in Nvidia and Is Piling Into This Historically Cheap Cyclical Stock was originally published by The Motley Fool