Investors could do worse than investing in the so-called "Magnificent Seven" stocks. The collective gained 111%, on average, in 2023, thrashing the 24% gains of the S&P 500. The group has continued its winning ways, rising 22% on average so far this year, nearly double the 11% increase of the S&P 500 (as of this writing).
The common thread that unites these tech bellwethers is that they each have artificial intelligence (AI) in their DNA. In recent months, however, some investors have begun to fear that the rally that propelled the Magnificent Seven higher is no longer sustainable and have been looking to other quarters for growth.
Among those investors is billionaire David Tepper, who heads Appaloosa Management, the hedge fund he founded in 1993. Tepper is worth roughly $20.6 billion and has been called "arguably the greatest hedge fund manager of his generation," for his knack for consistently outperforming his industry peers.
It's notable, then, that Tepper decreased his exposure to the Magnificent Seven stocks to close out the first quarter.
Image source: Getty Images.
Out with the old...
A regulatory filing released just this week revealed that Tepper had made big changes among his largest holdings, decreasing his stake in each of the five Magnificent Seven stocks in Appaloosa's portfolio.
Tepper cut his stake in Nvidia (NVDA +1.73%) by 44%. He obviously still believes there's additional potential, since Appaloosa still owns 442,000 shares worth an estimated $417 million (as of this writing). It's still the fund's fifth largest holding at roughly 6% of the portfolio.
The move was probably strategic on Tepper's part. After all, Nvidia stock is up a massive 546% since early last year, thanks to accelerating demand for its AI-centric processors. Given its remarkable run, there's likely not as much upside -- at least over the short term.
Tepper also slashed his stake in Meta Platforms (META 1.18%) stock by 39%, though it remains a cornerstone holding. Appaloosa still owns 1.1 million shares worth about $531 million, as the fund's fourth-largest holding.
Meta Platforms is the second-best performer among the Magnificent Seven, sporting gains of 293% since early last year. The digital advertising market is in the midst of a remarkable recovery, which will continue to boost Meta's fortunes, but Tepper clearly believes he can get better gains elsewhere.
NASDAQ: META
Key Data Points
Tepper also reduced his stakes in Microsoft by 18%, Alphabet by 10%, and Amazon by 3%, likely to raise funds for his latest purchases.
To me, the most surprising part of Tepper's move wasn't so much what he sold but what he bought instead, building his positions in a number of well-known Chinese stocks.
...In with the new
Appaloosa's biggest additions in Q1 are among China's most well-known companies.
Tepper boosted his stake in Alibaba (BABA 0.73%) by 158%. Appaloosa now owns 11.25 million shares worth an estimated $814 million. That makes the company Appaloosa's No. 1 holding at more than 12% of the portfolio.
Alibaba is best known as one of the largest e-commerce providers in China, which includes its Taobao and T-mall sites. Alibaba Cloud is the world's fourth-largest cloud infrastructure provider, with 4% of the market, behind Amazon Web Services, Microsoft Azure, and Google Cloud, with 31%, 25%, and 11%, respectively. The company has also been investing heavily in AI to boost its competitive advantages and has noted that much of its recent cloud growth has been driven by AI.
Tepper also increased his stake in PDD Holdings (PDD 2.69%), also known as Pinduoduo, by 171%. Appaloosa now owns 2.1 million shares worth an estimated $244 million. As a result, it has risen to its ninth-largest holding at nearly 4% of the portfolio.
Pinduoduo's online marketplace has become the world's second-largest e-commerce company and the largest in China. The company is leveraging its position by expanding internationally with its Temu platform and has been growing faster than its larger rival, Alibaba.
NASDAQ: PDD
Key Data Points
Finally, Tepper increased his stake in China's search leader Baidu (BIDU +0.84%) by 188%. The hedge fund now owns 1.8 million shares worth an estimated $190 million. As a result, it has risen to its 10th-largest holding at roughly 3% of the portfolio.
Aside from its search supremacy, Baidu is one of the largest digital advertisers in China and provides a host of internet and AI-related services.
Should investors follow suit?
It isn't too surprising that Tepper would see value in stocks from China. Earlier this year, China's CSI 300 Index fell to a five-year low as the country's economy continued to struggle. Contracting manufacturing activity, which had fallen for four successive months, helped fuel the decline.
This has driven the valuations of some of China's most popular stocks to multi-year lows. Even after an uptick in Q1, PDD, Alibaba, and Baidu are selling for 25 times, 20 times, and 14 times trailing 12-month earnings, a discount to the price-to-earnings (P/E) ratio of 28 for the S&P 500.
Tepper's moves may have been wise. Over the past few months, there have been improvements in China's economic prospects. The country's gross domestic product (GDP) increased 5.3% year over year in Q1, while the manufacturing and services sectors grew by 6% and 5%, respectively.
That said, investors should be aware of the additional risk factors that are part of investing in China. The economy is still a wild card, government crackdowns can negatively affect investments, and relations between China and the U.S. are frequently rocky.
While Tepper's picks may seem intriguing, investors should merely use this information as a starting point and do their own research to determine if these stocks are a good fit with their investing philosophy and risk tolerance.
It's worth noting that Amazon, Microsoft, Meta Platforms, Nvidia, and Alphabet collectively still make up 38% of Tepper's portfolio, so he obviously believes each of these stocks has room to run. However, it's clear from his purchases this quarter that Tepper believes China stocks could have more upside.
