Billionaire David Tepper sold 84% of Appaloosa's stake in Nvidia and is now investing in this historically cheap cyclical stock

Although all eyes have seemed to be on the Federal Reserve and its monthly inflation reports recently, the most important data of the third quarter was released about six weeks ago.

On August 14, institutional investors with at least $100 million in assets under management were required to file Form 13F with the U.S. Securities and Exchange Commission (SEC). Form 13F gives investors a glimpse into the stocks that Wall Street's most successful money managers bought and sold during the most recent quarter (in this case, the quarter ending in June).

While 13F forms have well-known flaws—they are 45 days old when filed and therefore contain outdated information for active hedge funds—they can still provide valuable insight into which stocks, industries, sectors and trends are attracting the undivided attention of Wall Street's biggest investment minds.

Apart from what the most prominent investors on Wall Street are planning, such as Warren Buffett at Berkshire-HathawayInvestors tend to keep a close eye on what billionaire David Tepper and his team at Appaloosa are up to. That's because Tepper's fund has delivered gross annual returns of more than 28% in the 30 years since 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 entirely, and reducing 26. Perhaps none of these reductions stands out more than the artificial intelligence (AI) leader. NVIDIA (NASDAQ: NVDA).

David Tepper has cut his fund's stake in AI giant Nvidia – and probably for good reason

Tepper's Appaloosa ended the quarter ending March with 4.42 million Nvidia shares. Between early April and late June, during Nvidia's historic 10-for-1 stock split and rise to an all-time high of $140.76 per share, Tepper oversaw the disposal of 3.73 million shares, or 84.39% of his fund's previous holding.

While some of this selling activity was likely to be related to securing profits from a position that is in positive territory, essentially Since the transaction began in the first quarter of 2023, there are a number of other reasons why Tepper and his team likely sold most of their shares in Nvidia.

First of all, there are good reasons to believe that an AI bubble is forming. For 30 years, no company at the forefront of a new major technology or innovation has been immune from a bubble bursting. Since most companies do not have clearly defined plans to generate a positive return on their AI investments in the near future, it looks like investors have once again overestimated the adoption and utility of a new technology. If the AI ​​bubble bursts, no company would suffer more than Nvidia.

The story continues

Tepper and his team at Appaloosa may also anticipate increasing competition in the AI ​​space. Although Nvidia's graphics processing units (GPUs) accounted for about 98% of units shipped to data centers in 2022 and 2023, outside competitors are increasing production of their AI GPUs.

In addition, all four of Nvidia's top-selling customers are working on AI GPUs for use in their data centers. Even if Nvidia's hardware retains its compute superiority, the cost and delivery advantage of using internally developed chips means Nvidia will lose future business.

Insider selling is another reason why Appaloosa's smartest investors might be turning down Nvidia. While there are a number of reasons to sell stock, some of which are harmless, the only reason to buy stock on the open market is because you believe it will go higher. The last time an Nvidia insider bought shares of their company on the open market was in December 2020!

The final piece of the puzzle is that David Tepper has traditionally focused on undervalued or distressed assets. Right now, the stock market is historically expensive. When stock prices eventually flip, which happens when valuations are inflated, companies with high premiums like Nvidia are often hit the hardest.

But even more interesting than the sale of most of his fund's Nvidia shares to billionaire David Tepper is the fact that he chose exceptionally cheap cyclical stocks in the quarter ending June.

Billionaire David Tepper can't stop buying this historically cheap consumer cyclical stock

Although Tepper and his team added nine existing positions in the second quarter, the position that really stood out was the purchase of 660,737 shares of China's second-largest e-commerce company. JD.com (NASDAQ: JD). This increased Appaloosa's holdings by just over 18% and brought the fund's holdings to 4,310,600 shares, valued at about $116 million, at the time of this writing.

Chinese stock markets have had a tough time in recent years. Strict lockdowns and containment measures in the provinces during the COVID-19 pandemic led to all sorts of supply chain problems for the world's second-largest economy.

In addition, China's regulatory climate is strict and unpredictable. Even with faster economic growth, investors are wary of paying higher multiples for Chinese stocks given regulatory unknowns.

Nevertheless, JD has a number of long-term growth drivers and the stock is incredibly cheap.

The obvious catalyst for JD is that China's economy typically grows faster than that of most developed countries. Although the economic recovery since COVID-19 restrictions were lifted in December 2022 has been disappointing, the Chinese economy should regain its footing relatively soon.

In this context, China is still relatively early in extending e-commerce to its growing middle class. While e-commerce is a mature concept in the US, it can still offer significant growth in the world's second-largest economy.

On a more company-specific basis, JD appears better positioned to deliver better margins over the long term compared to China's leading online retail platform. AlibabaWhile the latter generates most of its revenue as a third-party marketplace, JD acts more like AmazonIn other words, JD controls the inventory and logistics needed to get products to consumers after they're ordered. Now that JD can control more aspects of its network, it should be able to overtake Alibaba in terms of margins.

JD also generates enough cash flow and has enough money to start new ventures. In addition to the logistics business, the company also operates a healthcare division and is aggressively investing in AI to improve various aspects of the business. This includes the company using AI to make predictions about the supply chain and inventory.

And finally, JD is swimming in cash. The company ended June with $28.8 billion in cash, cash equivalents, short-term investments and committed cash, compared to $8.6 billion in short-term and long-term debt and senior unsecured notes. That's just over $20 billion in net cash for a company with a $41 billion market cap.

At the close on September 18, JD's stock was trading at just 6.5 times forecast 2025 earnings per share – and that doesn't even take into account that nearly half of the company's value is in cash. That's an incredible bargain that billionaire David Tepper was able to cleverly snap up.

Should you invest $1,000 in Nvidia now?

Before you buy Nvidia stock, consider the following:

The Motley Fool Stock Advisor The analyst team has just published what they believe to be The 10 best stocks for investors to buy now… and Nvidia wasn't among them. The 10 stocks that made the cut could deliver huge returns in the years to come.

Consider when NVIDIA created this list on April 15, 2005… if you had invested $1,000 at the time of our recommendation, You would have $710,860!*

Stock Advisor offers investors an easy-to-understand plan for success, including instructions on how to build a portfolio, regular updates from analysts, and two new stock recommendations per month. The Stock Advisor Service has more than quadrupled the return of the S&P 500 since 2002*.

View the 10 stocks »

*Stock Advisor returns as of 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 in Amazon, Berkshire Hathaway, JD.com and Nvidia and recommends them. 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 now investing in this historically cheap cyclical stock. This article was originally published by The Motley Fool.