Sometimes investors have to open their minds and expand their geographic horizons to find compelling values. For one billionaire at least, this meant loading up on some well-known Chinese technology firms.
The billionaire in question is David Tepper, who founded and currently manages the Appaloosa Management hedge fund. He also owns the Carolina Panthers and the Charlotte Rugby Football Club.
Tepper recently trimmed his fund’s holdings in certain American technology stocks while increasing its exposure to China-based tech businesses. Of course, this strategy isn’t limited to the ultra-wealthy, so you can follow Tepper’s trades, albeit not at the same scale. Let’s see what notable moves Tepper and Appaloosa made in the first quarter of 2024.
Less Mag-7, more China
According to Bloomberg, Tepper reduced Appaloosa’s holdings in Magnificent Seven stocks, including Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META) and NVIDIA (NASDAQ:NVDA). This Mag-7 trimming is almost blasphemous during a time when mega-cap technology names dominate the financial-media headlines.
Before anyone accuses Tepper of being unpatriotic, just consider what he’s doing as a rebalancing strategy based on valuations. The four aforementioned Mag-7 companies have GAAP trailing 12-month price-to-earnings (P/E) ratios that value investors might object to:
- Amazon: 51.83 times earnings
- Microsoft: 36.41 times earnings
- Meta Platforms: 27.2 times earnings
- NVIDIA: 77.52 times earnings
Meta Platforms is the most favorable of that group, but META stock also jumped from $100 to $500 over the past year and a half. Hence, it’s understandable if Tepper engaged in some profit-taking with this particular stock.
As Tepper backed away from Mag-7 stocks in the first quarter, he moved toward certain China-based technology names. This might not seem like a great value-investment strategy since the MSCI China Index (MSCI) has rallied sharply since January.
However, Bloomberg observed that the MSCI China Index trades at “less than half of the valuation” of the S&P 500 (SPX). Thus, Chinese stocks may be relatively cheaper — even if they’re not necessarily cheap.
Drilling down to the specifics, Tepper more than doubled Appaloosa Management’s position in Alibaba (NYSE:BABA) stock. That’s interesting as Alibaba is basically the Chinese counterpart to America’s Amazon, and as I mentioned earlier, Tepper reduced his share position in Amazon.
Alibaba’s P/E ratio of 20.46 suggests that the company is less richly valued than Amazon by a wide margin. Furthermore, Alibaba managed to grow its revenue by 7% year over year in the first quarter despite China’s challenging economy.
Alibaba Chief Financial Officer Toby Xu also emphasized the company’s commitment to returning value to the company’s shareholders.
“During fiscal year 2024, we repurchased US$12.5 billion of shares, and our board of directors has approved a US$4 billion dividend for fiscal year 2024,” Xu reported.”
Achieving China exposure through stocks and funds
Along with Alibaba stock, Appaloosa Management increased its positions in Baidu (NASDAQ:BIDU) stock and PDD (NASDAQ:PDD) stock. Moreover, the hedge fund purchased JD.com (NASDAQ:JD) stock and two China-focused exchange-traded funds (ETFs), which I will discuss in a moment.
Here’s a quick rundown of these companies’ P/E ratios:
Bear in mind that all of these P/E ratios may have been substantially lower when Appaloosa bought the stocks during the first quarter. However, there still doesn’t seem to be anything over-valued here.
Given its low valuation, Baidu stock may be the most intriguing pick of the bunch. The company’s first-quarter 2024 revenue grew slightly to 31.513 million RMB, versus 31.144 million RMB in the year-earlier quarter.
For years, Baidu was effectively China’s equivalent of Alphabet’s (NASDAQ:GOOGL) (NASDAQ:GOOG) Google. However, Baidu presents itself today as a “leading” artificial intelligence (AI) company “with [a] strong Internet foundation.”
In other words, AI mania isn’t limited to the U.S. markets. As for PDD and JD.com, they are both profitable Chinese e-commerce firms that aren’t excessively valued at the moment.
All in all, Tepper might be justified in pivoting toward China-based technology names in 2024. On the other hand, if you don’t want to be a stock picker, then take a look at the two funds that Appaloosa Management added.
Those funds are the iShares China Large-Cap ETF (NYSEARCA:FXI) and the KraneShares CSI China Internet ETF (NYSEARCA:KWEB). Like Tepper, you can add those two ETFs to your portfolio along with individual Chinese stocks for added leverage. Then if China’s economic recovery gains traction, you just might achieve magnificent returns from these non-Magnificent-Seven picks.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
