Anything related to artificial intelligence (AI) has been a hot ticket on Wall Street over the last 18 months. Shares of AI chip leader Nvidia (NASDAQ: NVDA) have more than doubled this year, making it one of the top performers in the S&P 500 index. But it's telling that the wealthiest investors are not chasing it at these lofty highs.
Billionaires generally will not invest their assets in expensive growth stocks that could be susceptible to a market decline. Nvidia may continue to hit new highs this year, but there's also substantial downside risk if the company doesn't meet Wall Street's sky-high growth expectations.
Billionaires are interested in growing and preserving their assets. This usually leads them to look for reasonably priced companies that have competitive advantages that are underestimated by the market.
One area these investors are plowing into right now is China's $6.5 trillion retail sector, which has been under pressure due to a weak economy, driving down the valuations for leading companies. David Tepper of Appaloosa Management and Howard Marks of Oaktree Capital Management were busy buying shares of China's leading retail stocks in the first quarter.
In fact, Tepper's firm has been selling Nvidia and piling into Chinese retail stocks. Let's look at two stocks and one ETF these investors have been buying this year.
1. Alibaba
Shares of Alibaba (NYSE: BABA) are down 75% over the last four years, as intensifying competition in China's e-commerce market, most notably from PDD Holdings' Temu, and a choppy economy pressured sales at Alibaba's Tmall and Taobao marketplaces.
Alibaba was David Tepper's largest holding as of March 31 after his firm more than doubled its stake in the quarter. Tepper is one of the most successful hedge fund managers of the last 20 years. His net worth nearly doubled over the last five years to more than $20 billion, according to Forbes.
Alibaba operates one of the largest retailer marketplaces in China, but it doesn't sell goods from its own inventory. Instead, it generates a profitable stream of revenue from fees and commissions it charges to merchants that sell through its marketplaces, including AliExpress. It also has several revenue streams from cloud services, logistics services, and digital entertainment. However, online commerce is Alibaba's largest business.
Over the last year, the company generated $21 billion in free cash flow on $130 billion of revenue. The stock trades at an incredibly low price-to-free cash flow ratio of just 8. At this bargain-basement valuation, the stock offers significant upside if the company can sustain any amount of growth in the years to come.
In the March-ending fiscal fourth quarter, Alibaba's total revenue grew 8% year over year, driven by a 45% year-over-year increase in its international commerce business. AliExpress continues to experience great momentum in overseas markets, but management also noted that its Tmall Taobao group saw higher purchase frequency after making efforts to be more price competitive.
Alibaba is starting to regain strength in China's e-commerce market, which explains why Tepper likes the stock's return prospects at these lower share prices.
2. JD.com
Shares of JD.com (NASDAQ: JD) are also down 75% off their previous peak. JD was a fast-growing business just a few years ago, with annual revenue growing more than 20% year over year through 2021. But the challenging retail market caused revenue to decline by less than 1% in 2023.
Howard Marks' background involves investing in high-yield bonds and distressed debt, so he's an expert at evaluating risks. This is notable, as his firm added to its stake in JD.com in the first quarter. Oaktree also holds positions in several other China stocks, including Alibaba, so he clearly sees attractive value across China's internet sector.
Unlike Alibaba, JD.com holds inventory that it sells itself, so it doesn't have the high margins of its peer. However, the company's competitive advantage is found in its supply chain capabilities. For example, Walmart sells on JD.com's platform, which indicates a tremendously valuable asset the company brings to China's massive retail sector.
JD.com also has growing capabilities in AI that it uses to manage inventory and merchandise sourcing. The company also uses this technology to gather consumer insights that help grow sales and improve customer satisfaction.
After a year of weak sales, JD is leveraging these strengths to its advantage. After getting more price competitive, it noted higher shopping frequency and increased order volume in the first quarter. Total revenue grew 7% year over year -- a significant improvement.
Most encouraging is that the greater price competitiveness didn't hurt margins. It still posted a 15% increase in net income over the year-ago quarter. Yet, the stock still trades at an incredibly low forward price-to-earnings ratio of 7.3. It's even cheaper on a price-to-free cash flow basis.
3. KraneShares CSI China Internet ETF
David Tepper also has been buying the KraneShares CSI China Internet ETF (NYSEMKT: KWEB), which is a great option for investors to gain instant diversification and potential upside from China's leading online retail and entertainment companies.
Here's a list of the top 10 holdings in the fund as of Aug. 1, and their percentage weighting:
Tencent Holdings (10.64%)
Alibaba (10.29%)
PDD Holdings (7.96%)
Meituan (7.45%)
JD.com (5.68%)
Netease (4.43%)
Tencent Music Entertainment (4.07%)
Baidu (4.02%)
KE Holdings (3.81%)
Kuaishou Technology (3.79%)
From the fund's inception in 2013 through 2020, a $1,000 investment would have grown to $3,100. But an investor who held from inception through the collapse over the last few years would still be sitting on a small gain.
China's economy can be significantly impacted by new laws and regulations, which is why investors probably shouldn't consider this ETF for a long-term buy-and-hold. But the outlook for significant returns over the next few years looks very favorable if leading retail companies continue to show improving sales trends.
The fund has an expense ratio of 0.70%, which is reasonable for a specialty fund that is tracking a specific sector of the market. This means it costs $7 annually to hold shares for every $1,000 invested.
Overall, this ETF's diversification makes it the safest way to profit from China's retail comeback.
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John Ballard has positions in Nvidia and Tencent. The Motley Fool has positions in and recommends Baidu, JD.com, Nvidia, Tencent, and Walmart. The Motley Fool recommends Alibaba Group and NetEase. The Motley Fool has a disclosure policy.
Forget Nvidia: Billionaires Are Scooping Up Bargains in This $6.5 Trillion Market was originally published by The Motley Fool