Billionaire David Tepper made quite a name for himself on Wall Street. He helms Appaloosa Management -- the hedge fund he founded back in 1993. He has been called "arguably the greatest hedge fund manager of his generation" and also consistently outperforms his peers.
He correctly predicted the collapse of the housing market and the resulting financial crisis that led to the Great Recession in 2008. He also loaded up on bank stocks at the depths of the downturn, a strategy that eventually turned a significant profit for Appaloosa investors. With a resume like that, it's no wonder that many investors follow his moves with keen interest.
It raised some eyebrows when Tepper significantly reduced his stakes in Nvidia (NVDA -0.67%) and Alphabet (GOOGL -3.54%) (GOOG -3.44%) in the fourth quarter while opting to increase his stakes in two other members of the "Magnificent Seven."
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A changing of the guard
In the fourth quarter, Tepper made some big changes to the upper echelons of Appaloosa's portfolio, cutting his stake in Nvidia by 23%. He obviously still sees upside in the stock, as the hedge fund still owns 790,000 shares worth an estimated $678 million). And Nvidia is still Appaloosa's fourth-largest holding at nearly 7% of the portfolio.
The sale was likely a calculated move on Tepper's part. After all, Nvidia gained 239% last year and was selling for 65 times earnings and 27 times sales, so its valuation was steep.
Tepper also slashed his stake in Alphabet stock by 16%, though it remains the fund's seventh-largest holding. Appaloosa now owns 2.3 million shares worth about $388 million.
In this case, though, there's no obvious catalyst explaining his decision to sell. The stock was still reasonably priced at year's end, trading for 24 times earnings. He may have had concerns about the timing of the rebound in the digital ad market -- which is responsible for the lion's share of Alphabet's revenue -- or questions about how AI will ultimately impact Google's near monopoly in search.
The Magnificent Seven stocks he bought instead
In moves that aren't too surprising, Tepper added to his existing stakes in two of Appaloosa's top three holdings, as he's apparently still bullish on their prospects.
Microsoft (MSFT -1.32%) cemented its place as the hedge fund's No. 2 holding as Tepper increased his stake by 4%. This brought the total count to 1.7 million shares currently worth roughly $710 million, or 11.3% of Appaloosa's holdings. Microsoft arguably kick-started the AI revolution when it invested in Chat-GPT creator OpenAI and integrated generative AI capabilities across a broad cross-section of its workplace productivity tools.
The biggest opportunity, however, is likely Copilot, its AI-powered digital assistant. Microsoft debuted a number of job-specific versions of Copilot that help automate otherwise time-consuming tasks. The company gained cloud market share, the result of strong demand for its AI tools.
Microsoft stock was selling for a slight premium of 34 times sales at the end of the fourth quarter, but given its quick move into the AI marketplace and the potential for profits, that valuation is more than reasonable.
Amazon (AMZN 0.34%) was the second of Tepper's Magnificent Seven purchases. He increased his holdings by 5%, bringing Appaloosa's total stake to 3.95 million shares. At their current value of about $711 million, they account for 11% of the portfolio. As the undisputed cloud infrastructure leader, Amazon has a captive audience for its AI products and services.
The company released a bevy of helpful tools on its e-commerce platform to streamline the processes of selling goods and buying advertising. Furthermore, Amazon has a long history of managing its online retail business in part with AI systems, which help it maintain adequate inventory levels, surface relevant recommendations, schedule more efficient delivery routes, and more.
And with the stock trading at less than 3 times sales at the end of the fourth quarter, Amazon was a steal.
A timely investing lesson
So far, Tepper's results from these moves have been mixed. Nvidia stock gained 80% so far this year, which has kept it in its position as the undisputed champion among the Magnificent Seven. Alphabet stock is up 11%. Over the same period, Amazon and Microsoft have gained 20% and 12%, respectively. This suggests that Tepper would have been better off had he not made any changes at all to his allocations to these stocks.
There's a lesson here for investors. If the investing thesis for one of your holdings hasn't changed -- even if the stock sports a nosebleed valuation -- it's sometimes best to stay the course. The AI revolution has just started, and while competition is ramping up, Nvidia's AI processors are still the best in the business. And Alphabet has a long track record of successfully deploying AI algorithms to further its business objectives, and there's no evidence to suggest that this time will be any different.
Influential economist John Maynard Keynes reportedly said, "Markets can remain irrational longer than you can remain solvent." Applied to this case, I take that to mean it's best not to make investing decisions based on what the broader market is expected to do, but rather to focus on a company's prospects.
