Investors could do worse than investing in the so-called “Magnificent Seven” stocks. The collective gained an average of 111% in 2023, exceeding the 24% gains of the S&P 500. The group has continued its winning ways, rising an average of 22% so far this year, almost double the S&P 500’s 11% rise (as of this writing).
The common thread that connects these tech pioneers is that they all have artificial intelligence (AI) in their DNA. In recent months, however, some investors have begun to fear that the rally that pushed the Magnificent Seven higher is no longer sustainable and have turned to other quarters for growth.
Those investors include billionaire David Tepper, who runs Appaloosa Management, the hedge fund he founded in 1993. Tepper is worth about $20.6 billion and has been called “arguably the greatest hedge fund manager of his generation” because of his talent for always outperforming his industry peers.
It is therefore notable that Tepper reduced his exposure to Magnificent Seven shares at the end of the first quarter.
Out with the old man…
A regulatory filing released just this week revealed that Tepper had made major changes to his largest holdings, reducing his stake in each of the five Magnificent Seven stocks in Appaloosa’s portfolio.
Tepper reduced his bet Nvidia (NASDAQ:NVDA) by 44%. He clearly still believes in additional potential, as Appaloosa still owns 442,000 shares worth an estimated $417 million (as of this writing). At around 6% of the portfolio, it is still the fund’s fifth-largest holding.
The move was likely strategic on Tepper’s part. After all, Nvidia stock is up a whopping 546% since the start of last year, thanks to increasing demand for its AI-centric processors. Given the remarkable development, there may not be that much upside potential, at least in the short term.
Tepper also reduced his share Metaplatforms (NASDAQ:META) The stock is up 39%, although it remains a cornerstone stock. Appaloosa still owns 1.1 million shares worth about $531 million, making it the fund’s fourth-largest holding.
Meta Platforms is the second best performer among the Magnificent Seven, up 293% since the start of last year. The digital advertising market is in the midst of a remarkable recovery that will further boost Meta’s fortunes, but Tepper clearly believes he can make better profits elsewhere.
Tepper also reduced his shares Microsoft by 18%, alphabet by 10% and Amazon by 3%, probably to raise money for his final 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.
…go with the new one
Appaloosa’s biggest additions in the first quarter are among China’s most prominent companies.
Tepper increased his stake Ali Baba (NYSE: BABA) by 158%. Appaloosa now owns 11.25 million shares worth an estimated $814 million. This makes Appaloosa the No. 1 holding with more than 12% of the portfolio.
Alibaba is best known as one of the largest e-commerce players in China, which also includes the Taobao and T-Mall websites. Alibaba Cloud is the world’s fourth largest cloud infrastructure provider with 4% market share, behind Amazon Web Services, Microsoft Azure and Google Cloud with 31%, 25% and 11%, respectively. The company has also invested heavily in AI to strengthen its competitive advantages and has noted that much of its recent cloud growth has been driven by AI.
Tepper also increased his share PDD holdings (NASDAQ:PDD), also known as Pinduoduo, by 171%. Appaloosa now owns 2.1 million shares worth an estimated $244 million. This has made the company the ninth-largest share, with almost 4% of the portfolio.
Pinduoduo’s online marketplace has become the second largest e-commerce company in the world and the largest in China. The company is leveraging its position through international expansion with its Temu platform and has grown faster than its larger competitor Alibaba.
Finally, Tepper increased its stake in China’s search leader Baidu (NASDAQ:BIDU) by 188%. The hedge fund now owns 1.8 million shares worth an estimated $190 million. This has made it the tenth largest share at around 3% of the portfolio.
Aside from its search supremacy, Baidu is one of the largest digital advertisers in China, offering a variety of internet and AI-related services.
Should investors follow suit?
It’s not too surprising that Tepper sees 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. Declining order production, which had fallen for four consecutive months, contributed to the decline.
This has driven valuations of some of China’s most popular stocks to multi-year lows. Even after a first-quarter surge, PDD, Alibaba and Baidu are selling at 25 times, 20 times and 14 times trailing 12-month earnings, a discount to price-to-earnings (P/E) ratios of 28 S&P 500.
Tepper’s moves may have been wise. In recent months, China’s economic prospects have improved. The country’s gross domestic product (GDP) rose 5.3% year-on-year in the first quarter, while the manufacturing and services sectors grew 6% and 5%, respectively.
However, investors should be aware of the additional risk factors that come with investing in China. The economy is still a wild card, government actions can negatively impact investments and relations between China and the US are often difficult.
While Tepper’s selection may seem interesting, investors should only use this information as a starting point and do their own research to determine whether these stocks are a good fit for their investment philosophy and risk tolerance.
It is worth noting that Amazon, Microsoft, Meta Platforms, Nvidia and Alphabet are represented together Despite it make up 38% of Tepper’s portfolio, so he obviously believes each of these stocks still has room to run. However, it’s clear from his purchases this quarter that Tepper believes Chinese stocks could have even more upside potential.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions at Alphabet, Amazon, Baidu, Meta Platforms, Microsoft and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Baidu, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends Alibaba Group and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Billionaire investor David Tepper sold shares of Nvidia, Meta Platforms and other “Magnificent Seven” on a large scale last quarter. You won’t believe what he bought instead. was originally published by The Motley Fool