Why David Tepper Is Selling the Magnificent 7 to Buy Alibaba

Appaloosa Management, the hedge fund run by David Tepper, has made e-commerce platform Alibaba Group Holdings BABA (HK:9988) its biggest position, as it makes a major move into beaten-down Chinese stocks.

Appaloosa LP held US$814 million in Alibaba stock as of the end of March, according to a filing lodged last week with the Securities and Exchange Commission. The next-largest holding in the fund is Amazon.com AMZN, a US$690 million position. The New Jersey-based fund has almost trebled the Alibaba holding to 11.25 million shares since December 31, while slightly trimming the number of AMZN shares in the portfolio.

We’ve been waiting for a China rally, when stocks have in the past leapt some 60%. Alibaba stock is up 25.2% since April 17, making for a 15.2% year-to-date gain. So while Appaloosa bought in over the course of the first three months, it has only really gained from the increase in its position if it has maintained the holding over the last month.

I’m sure it has. The hedge fund appears to be betting big that the rally in China and Hong Kong can continue. It’s been buying into or dramatically increasing its position in a virtual “Who’s Who” of Chinese Big Tech.

In my last column, I examined whether Hong Kong, a serial underperformer, can sustain a runup that has seen it add around 20% since the tide turned on April 19. Hong Kong has experienced an even-greater savaging than mainland stocks, since international investors can easily buy into and out of Hong Kong stocks. They’ve essentially gone nowhere this century.

Appaloosa has been buying Chinese companies with U.S. listings, which makes the most sense for American investors. They trade while you’re trading, and in the past the best-quality Chinese stocks came to Wall Street. Given U.S.-China geopolitical tensions, though, that’s beginning to change, as Hong Kong listings gain in priority for Chinese C-teams.

The Appaloosa fund has been trimming not only Amazon but also other “Magnificent 7” stocks, reducing the number of shares held in Google parent Alphabet (GOOGL), Facebook operator Meta Platforms META, Microsoft MSFT and Nvidia NVDA over the course of the last six months. Together with Amazon, though, those five companies remain the next-largest positions behind Alibaba.

The hedge fund sold out of Apple AAPL in the September 2023 quarter, and also does not hold Tesla TSLA, the recent underperformers in that Mag 7 grouping, which is increasingly outdated as a result. Just as Netflix NFLX was jettisoned, there’s a case for casting those two aside and inside considering whether a company like Eli Lilly LLY, up 35.6% this year and with Q1 profits that jumped 66.8% on sales that were up 26.0%, could edge in.

Besides Alibaba, the hedge fund has been buying rival e-commerce platform PDD Holdings (PDD), which specializes in group buying on its Pinduoduo site in China but has launched the highly popular Temu app with a big splash overseas.

Appaloosa now holds US$244 million in PDD stock. It now holds double the value and triple the number of shares it held heading into 2024.

The fund has a new position in JD.com JD (HK:9618), the third major e-commerce platform within China, and a company that has strong vertical integration and distribution. The latest filing shows a new holding worth US$100 million in JD shares.

It has also ramped up its holding in Chinese search engine Baidu BIDU (HK:9888) to US$190 million, again with triple the number of shares it held at the end of last year.

Baidu has worked out less optimally. BIDU shares ran up 19.4% in the month between April 19 and May 17, but have corrected 9.1% since then thanks to earnings released last Thursday indicating revenues rose only 1% in the March quarter. China’s economic growth remains subdued, making advertisers cautious.

More Investing and Trading:

Appaloosa is not blanket bullish on China. It bought stock in the Chinese developer KE Holdings BEKE (HK:2423) in the September 2023 quarter, but has trimmed its position since then. The rally in China has been supported by word that the Beijing central government will help direct bank lending into unbuilt flats, to help stem the death spiral in the property sector.

Appaloosa has also previously held JD.com, but is apparently trading it tactically. It didn’t hold any of the shares at the end of last year but had a position worth half the current size back in September.

Beyond mainland China, Appaloosa halved the number of shares it holds in Taiwan Semiconductor Manufacturing Co. TSM (TW:2330) in the December quarter.

It would have been better to maintain that position, in retrospect. The world’s largest chip foundry was my pick for the stock to watch in Asia in 2024, and is up 51.4% year-to-date.

These bets are generally on Chinese tech. It would take a brave investor to wade into Chinese property stocks, most of them now reduced to penny shares. But some kind of resolution to real-estate woes would suggest a bottom has formed for China, meaning the likely direction of the China and Hong Kong markets will continue to be up.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.