David Tepper's Shift from Trillion-Dollar Stocks to Value Investments

One of Wall Street's leading deep-value investors is shifting his focus towards the second-largest economy in the world in search of better investment opportunities.

For those with a positive outlook, it seems like a great time to invest on Wall Street. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have been on an impressive upward trajectory for over two years.

This stock market rally can be attributed to several factors, including the advent of the artificial intelligence (AI) revolution, the potential return of Donald Trump to the White House, resilience in the U.S. economy, and decreasing inflation rates from their highest levels in 40 years.

We see that billionaire investors are paying close attention to these market dynamics. Many of them are either increasing their stakes in, or maintaining their positions in, influential companies that have driven the stock market rally. This trend is easy to track thanks to mandatory Form 13F filings with the Securities and Exchange Commission, which reveal the trading activities of top asset managers.

David Tepper Has Sold Shares in Six Major Companies

Billionaire investor David Tepper of Appaloosa Management is taking a different approach. His recent trading activity has seen him dump shares in six of the ten publicly traded companies in the U.S. that have achieved a trillion-dollar market cap:

• Meta Platforms (META): 1,325,000 shares sold
• Taiwan Semiconductor Manufacturing (TSM): 600,000 shares sold
• Microsoft (MSFT): 665,000 shares sold
• Nvidia (NVDA): 400,000 shares sold
• Alphabet (GOOGL): 868,036 Class C shares sold
• Amazon (AMZN): 550,000 shares sold

This significant reduction in stakes may simply be a case of profit-taking. All six companies have notably outperformed the S&P 500 over the past five years, propelled partly by the booming AI sector.

However, Tepper's actions could also suggest a cautious stance towards the AI trend. While AI seems poised to contribute to long-term growth in the corporate sector, history indicates that investors often overstate the early stages and potential of emerging technologies. If an AI bubble forms and subsequently bursts, companies like Nvidia and Taiwan Semiconductor, which are integral to the sector, could face severe repercussions.

Another underlying reason for Tepper's strategy might be related to rising stock valuations in a pricey market. Following an AI-driven decline earlier this week, the S&P 500's Shiller price-to-earnings (P/E) ratio stood at its third-highest level in 154 years of continuous bull markets. Patterns suggest that such elevated valuations may lead to declines of at least 20%.

Looking at forward P/E ratios, Microsoft is valued at a 13% higher multiple compared to its five-year average, while Meta's forward P/E stands at 21% more than its historical average. For Tepper, whose strategy typically favors undervalued stocks, these trillion-dollar companies no longer present ideal investment opportunities.

Tepper's Focus Turns to Cash-Rich Value Stocks

Despite the recent selling spree, Tepper is still finding opportunities for selective buying. According to his latest 13F filings, he has significantly increased his positions in three stocks:

• Alibaba Group (BABA): 6,400,000 shares purchased (a 178% increase year-over-year)
• JD.com (JD): 5,625,000 shares purchased (a 336% increase year-over-year)
• Baidu (BIDU): 760,000 shares purchased (a 114% increase year-over-year)

These three companies have a common denominator: they are all centered in China. Following the easing of strict COVID-19 measures in December 2022, China's economy has been working through various challenges. However, the growth of the middle class in the country presents a promising opportunity for superior long-term growth.

Alibaba and JD are the leaders in online retail in China, while Baidu has dominated the internet search engine market for over a decade. Each of these companies is also betting on AI becoming a key driver of future growth. For instance, Alibaba Cloud holds a leading position in China’s cloud infrastructure services, owning about 36% of the market by the end of September. Baidu and JD also offer various cloud services with high-margin potential.

Moreover, these companies have strong cash reserves, allowing them to invest in growth initiatives and stock buybacks. Such financial strength can enhance earnings per share and increase attractiveness to investors.

Lastly, Alibaba, JD, and Baidu align with Tepper's focus on deep-value investments. As the S&P 500 continues to climb, these three Chinese firms present compelling opportunities, with relatively low forward P/E ratios of 9.2, 9, and 9, respectively. When factoring in their net cash positions, their valuations become even more appealing.

In a marketplace where undervalued stocks are hard to identify, Tepper's cash-rich trio from China seems to fit perfectly within his investment strategy.

David, Tepper, Investments