How David Tepper Is Positioning for What Lies Ahead

Market action is choppy on Thursday, but strength in small-caps (IWM) is pushing breadth to about 59% positive, as I write. New 12-month highs to lows is close to even, which illustrates a mixed market.

Semiconductors (SMH) bounced back strongly but once again that is not good news for hyperscalers. The Mag 7 is down about 1% and both Alphabet (GOOGL) and Microsoft (MSFT) look poor.

The biotechnology group bounced back after a one-day pause. I remain heavily leveraged to that group and am waiting for entry points to develop as we move into earnings. One biotech name I highlighted recently is Ocular Therapeutix (OCUL). I added to that Thursday in anticipation of some data in a week or so.

A Bottom Fish Setup in Solar

A bottom fish name on my radar is Sunrun (RUN). I recently discussed their new distributed power agreement with Tesla (TSLA).

Sunrun announced the launch of a distributed artificial intelligence compute pilot program, which will place compute nodes in homes equipped with Sunrun solar and battery storage systems. Participating homeowners will be compensated for hosting the nodes. The pilot sounds promising and the stock is finding support around $12.

I’m slowly building a position. I don’t expect this one to move quickly.

Strategy

As I have been writing for weeks, my cash levels in client accounts are high. What I have not spent much time discussing is the fact that high cash does not necessarily mean weak returns. The concentration in biotechnology has produced good results even while a substantial amount of capital is sitting in cash waiting for better setups.

David Tepper is one of the most successful hedge fund managers of the past three decades. He compounded at roughly 25% a year after fees across his career and made a legendary trade buying banks like Bank of America (BAC) near $3 a share in early 2009. He now owns the Carolina Panthers and is running a $23 billion hedge fund.

His approach aligns with what I am doing now with a high cash position. His Appaloosa Management returned 32% in the first half of the year while carrying an average cash position of about 40%. He generated all of those gains in the second quarter, driven by concentrated bets on the memory chip names. He made that return using roughly 60% of his capital.

The lesson is not about which sector to own. My concentration has been in biotechnology and his has been in memory chips. The lesson is about the structure of the approach. Aggressive stock picking works well when you have the safety of a large cash position to reduce the overall risk. The cash lets you take bigger swings in the names where you have conviction because a bad outcome does not damage the whole portfolio.

The other important issue is to note what Tepper is not doing. He is not making a bearish bet. He is not positioning for a crash or predicting a top. He is making a strategic decision to preserve flexibility as we move into a transitional period. He does not know what happens next and he is not tied to a macro prediction. He is simply making sure he can respond to whatever the market delivers. He picked off a great trade in chips and now he is waiting for his next great trade to develop.

That is the same reason I am holding cash right now. We are in a transition as the old leaders break down and we wait for earnings season to give us the next opportunity. I do not know how the rotation resolves. I do not know what happens with Iran. I do not know whether the chip pricing power holds. What I do know is that having cash means I can act aggressively when the setups appear rather than being forced to sell something I want to keep in order to buy something new.

Currently I’m focused on a few shorter-term trades while I do some research and wait for the fireworks of earnings season. I don’t want to force things in the current environment but if I can knock out a few smaller trades it won’t hurt.

At the time of publication, Rev Shark was long OCUL and RUN.