While all eyes seem to be on the Federal Reserve and its monthly inflation reports lately, the most important third-quarter earnings release came about 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 view of what stocks Wall Street’s most successful money managers bought and sold during the most recent quarter (in this case, the quarter ending in June).
While the 13Fs have their flaws (they are 45 days old when filed, making them outdated information for active hedge funds), they can still provide valuable information about which stocks, industries, sectors and trends have the undivided attention of Wall Street’s top investment experts.
Aside from seeing what some of the most prominent investors on Wall Street have done, such as Warren Buffett at Berkshire HathawayInvestors tend to pay close attention to what billionaire David Tepper and his team have been up to at Appaloosa. That’s because Tepper’s fund has delivered gross annual returns of more than 28% over the 30-year period from its inception in 1993 through 2023.
Interestingly, Tepper and his team were big net sellers of stocks in the second quarter, adding nine positions, closing two positions outright, and reducing 26. Perhaps none of these reductions are more notable than the leader in artificial intelligence (AI). Nvidia (NASDAQ: NVDA).
David Tepper has cut his fund’s stake in AI giant Nvidia — and probably for good reason
Tepper’s Appaloosa closed the quarter ended March with 4.42 million shares of Nvidia stock. Between early April and late June, amid Nvidia’s historic 10-for-1 stock split and rally to an all-time intraday high of $140.76 per share, Tepper oversaw the sale of 3.73 million shares, or 84.39% of his fund’s previous holdings.
While some of this selling activity likely involved locking in profits on a position that was on the rise, essential Given that it launched in the first quarter of 2023, there are a number of other reasons why Tepper and his team likely divested most of their stake in Nvidia.
For starters, there’s good reason to believe that an AI bubble is in the making. No company that’s been at the forefront of a next-big-thing technology or innovation for 30 years has escaped a bubble-bursting event. With most companies lacking well-defined plans to generate positive returns on their AI investments anytime soon, it appears that investors have once again overestimated the adoption and utility of a new technology. If the AI bubble were to burst, no company would be more at fault than Nvidia.
Tepper and his team at Appaloosa may also expect competition in the AI arena to intensify. While Nvidia’s graphics processing units (GPUs) accounted for about 98% of units shipped to data centers in 2022 and 2023, third-party competitors are ramping up production of their AI GPUs.
Additionally, all four of Nvidia’s largest customers by net revenue are working on AI GPUs for use in their data centers. While Nvidia’s hardware should maintain its computing superiority, the cost and supply advantage of using internally developed chips means Nvidia will lose out on future orders.
Insider selling is another reason why Appaloosa’s smartest investors might be getting sour on Nvidia. While there are a number of reasons to sell stock, some of which are innocent, the only reason to buy stock on the open market is because you think it’s going to go up. The last time an Nvidia insider bought stock in their company on the open market was in 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 expensive. When stocks eventually roll over, which happens when valuations are raised, companies with high premiums, like Nvidia, are often the ones that get hit the hardest.
But what’s even more interesting than the fact that billionaire David Tepper sold most of his fund stake in Nvidia is the exceptionally cheap cyclical stock he invested in during the quarter ended June.
Billionaire David Tepper Can’t Stop Buying This Historically Cheap Cyclical Consumer Stock
While Tepper and his team added to nine existing positions in the second quarter, the 660,737 shares purchased of China’s No. 2 e-commerce company really stands out. JD.com (NASDAQ: JD)This increased Appaloosa’s stake by just over 18%, bringing the fund’s holdings to 4,310,600 shares, worth approximately $116 million, at the time of writing.
Chinese stocks have been through a rough patch in recent years, as strict provincial lockdowns and mitigation measures during the COVID-19 pandemic have led to a range of supply chain issues for the world’s second-largest economy.
To add, China’s regulatory environment is strict and unpredictable. Even with faster economic growth, investors are wary of paying higher multiples for China-based stocks, given the unfamiliarity of the regulations.
Still, JD has some long-term catalysts in its sails and the shares are surprisingly cheap.
The obvious catalyst for JD is that the Chinese economy has typically grown faster than most developed countries. While the economic recovery since COVID-19 restrictions were lifted in December 2022 has been disappointing, the Chinese economy should bounce back relatively quickly.
Building on this point, China is still in the relatively early stages of expanding the reach of e-commerce to its emerging middle class. While e-commerce is a mature concept in the US, it can still offer substantial growth in the world’s second-largest economy.
On a more company-specific basis, JD appears better equipped to deliver superior long-term margins compared to China’s leading online retail sales platform, AlibabaWhile the latter generates most of its revenue by acting as a third-party marketplace, JD operates more like a Amazon. In other words, it controls the inventory and logistics needed to get products to consumers once they’re ordered. By controlling more aspects of its network, JD should be able to outpace Alibaba on margin.
JD also generates ample cash flow and has deep enough pockets to focus on new ventures. In addition to its logistics operations, it has a health division and is investing aggressively in AI to improve various facets of the business. This includes leaning on AI to make predictions about its supply chain and inventory.
Finally, JD is swimming in cash. It ended June with $28.8 billion in cash, cash equivalents, short-term investments and restricted cash, compared with $8.6 billion in short- and long-term debt and unsecured senior notes. That’s a little more than $20 billion in net cash for a company with a market cap of $41 billion.
At the closing bell on Sept. 18, JD shares were trading at just 6.5 times consensus 2025 earnings per share — and that doesn’t take into account the fact that nearly half the company’s value is tied up in cash. It’s an incredible bargain that billionaire David Tepper has smartly jumped on.
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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, Now Investing in This Historically Cheap Cyclical Stock was originally published by The Motley Fool
