Whether you’re a relatively new investor or someone who’s been putting your money to work on Wall Street for decades, you’re probably aware of how overwhelming the number of data releases can be. Between thousands of publicly traded companies reporting their operating results every quarter and economic data released daily, it can be easy to overlook something important.
For example, August 14 marked the deadline for institutional investors with at least $100 million in assets under management (AUM) to file Form 13F with the Securities and Exchange Commission. A 13F provides a clear and easy-to-understand snapshot of which stocks Wall Street’s smartest and most successful money managers bought and sold in the last quarter. In this case, the August 14 filing date corresponds to trading activity ending in the June quarter.
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While 13Fs aren’t perfect — since they’re filed up to 45 calendar days after a quarter’s end, they can provide outdated information for active hedge funds — they can still provide useful clues about which stocks, industries, sectors and trends are luring the best investors from Wall Street.
While Warren Buffett is by far the most followed of all billionaire asset managers, there are a number of other billionaires whose moves are closely watched by savvy investors. This includes billionaire Cliff Asness of AQR Capital Management. Asness oversees more than $65 billion in assets under management at the fund he co-founded.
Among the thousands of trades that Asness and his team made during the quarter ending in June, perhaps none stands out more than him dumping one of Wall Street’s hottest artificial intelligence (AI) stocks and piling into an ultra-high yield company that has been crushing. it lately.
The biggest eyebrow-raiser in AQR Capital Management’s portfolio was Asness and his team of advisors showing the shares of a world-leading chip manufacturing company Taiwanese semiconductor manufacturing(NYSE: TSM) to the door. In just three months, Asness oversaw the sale of 1,411,917 shares of Taiwan Semi, representing 92% of what AQR held at the end of March.
At first glance, there’s plenty of reason to be excited about Taiwan Semi’s long-term prospects. Companies are eager to gain first-mover advantages thanks to the rise of AI, which means there is high demand from industry leaders Nvidia. Taiwan Semiconductor is rapidly expanding its chip-on-wafer-on-substrate (CoWoS) capacity to enable added AI graphics processing unit (GPU) production. CoWoS packaging is needed for the high-bandwidth memory used in AI-accelerated data centers.
Taiwan Semi is also more than just an AI GPU company. It is responsible for producing the lion’s share of the world’s advanced logic chips.
Nevertheless, there are three possible catalysts behind AQR’s strong sales of Taiwan Semi. The first and possibly most logical is that Asness and his crew took profits. Shares have more than doubled in the past year on hopes that demand for AI GPUs won’t slow down anytime soon. AQR is an active hedge fund, so it’s not out of the question that Asness and his advisors open the registers.
Asness and his team may also have hedged their portfolio before the November election. Although Taiwan Semi opened a factory in Japan earlier this year and is expanding its operations to the US, it still generates the lion’s share of its revenue from its home market of Taiwan. The potential for tariffs or bad trade relations between the US and other countries may have undermined the optimism surrounding Taiwan Semi for AQR’s brightest investment minds.
But perhaps the biggest concern of all is the possibility of an AI bubble developing. Over the past thirty years, investors have consistently overestimated the usefulness and acceptance by consumers and businesses of new technologies and innovations early in their lives.
In other words, we’ve seen every hyped innovation bust its way through an early-stage bubble. If this trend were to continue, the AI bubble will eventually burst, and this would undoubtedly hurt Taiwan Semi’s growth prospects. Not as much as Nvidia, mind you, but potentially enough to make investors think twice about its aggressive earnings numbers.
With AQR dumping Taiwan Semi’s shares and further reducing its stake in Nvidia, you might be wondering what the fast-growing/innovative company Asness and its advisors have jumped into instead. What if I told you that one of his fund’s biggest purchases lately has been ultra-high-yield tobacco stocks? Altria Group(NYSE:MO)?
As June 2023 came to an end, AQR owned 3,057,215 shares of Altria, the company behind premium tobacco brand Marlboro. But over twelve months, the Asness fund had increased its holdings by 112% to 6,490,441 shares.
There are pretty obvious downsides to investing in tobacco stocks. At the center is the reality that consumers are better informed about the potential risks of long-term tobacco use. Data from the Centers for Disease Control and Prevention shows that cigarette smoking rates among adults have fallen from about 42% in the mid-1960s to an estimated 11.5% in 2021. A dwindling number of consumers is generally not good news for a company. .
But even as Altria fights this uphill battle, it still has some key catalysts in its sails.
The biggest advantage that Altria Group brings is its pricing power. Tobacco contains nicotine, an addictive chemical. Altria is able to raise the price of its cigarettes to more than offset any weakness the company faces in overall shipments.
To further reinforce this point, being the parent company of the most dominant premium brand (Marlboro) helps drive prices up. Through the first nine months of 2024, Marlboro held a nearly 42% share of the domestic cigarette market. No matter how well or poorly the U.S. economy performs, history shows that smokers still buy cigarettes, leading to predictable cash flow year after year.
Don’t overlook Altria’s push for smokeless products either. Last year, it struck a $2.75 billion deal to acquire NJOY Holdings, a maker of electronic vapor products. Unlike the vast majority of e-vapor product companies, NJOY received a half-dozen marketing orders (MGOs) from the U.S. Food and Drug Administration before being acquired by Altria. While non-MGO products can theoretically be pulled from store shelves at any time, NJOYs have permission to go to market.
Altria’s valuation and high dividend yield were likely its final selling points. The company’s shares were valued at about eight times full-year earnings for much of the second quarter. Moreover, the yield hovered around 9%, which is significantly higher than what US government bonds offered. In retrospect, it seems to have been a smart bet that Asness and his team stormed into Altria.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Billionaire Cliff Asness has sold 92% of AQR’s stake in Taiwan Semiconductor and is jumping into the scorching ultra-high yield dividend stock. Originally published by The Motley Fool
