Key Points
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Amazon is investing a ton into its cloud computing business.
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Micron is thriving from a memory chip shortage.
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Alphabet has had a strong year, but it’s still a strong investment.
Tracking billionaire-run hedge funds is a great way to source ideas regarding stock picks. If the big boys are buying, then it stands to reason that those stocks are likely solid buys.
However, the trick is to invest alongside hedge funds that have long-term mindsets. That’s because investors only get a peek inside hedge funds’ portfolios about 45 days after a quarter ends, so the information we get on these funds is already fairly old. But if a fund has a long-term mindset, then the gap between reporting its holdings and the end of the quarter isn’t such a big deal.
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Billionaire David Tepper of Appaloosa Management runs one fund I follow. Its top three holdings are Amazon (NASDAQ: AMZN), Micron (NASDAQ: MU), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). All three of these look like great stocks to own now, as the AI arms race is still picking up speed.
Advisor explaining how a fund works.
Image source: Getty Images.
Amazon
Amazon is Appaloosa’s largest holding, although that wasn’t the case last quarter. In Q1, the fund essentially doubled its Amazon shareholding. Now, it makes up more than 15% of its total portfolio. That’s a huge vote of confidence, and if you read Amazon’s shareholder letter, you’ll know why.
The most valuable part of Amazon’s business isn’t its commerce platform; it’s the cloud computing division, Amazon Web Services (AWS). Amazon is investing a whopping $200 billion into this division this year, mainly because demand is so high. So far, it has been paying off because the revenue growth rate for AWS was its best in nearly four years during Q1. That will likely accelerate for some time due to the huge investments it’s making. Because this is a massively profitable part of Amazon’s business, it’s a great reason to load up on the stock as Appaloosa did.
Micron
Appaloosa added about 11% to its Micron stake in Q1, but it added a ton during Q4. Because it’s still buying, that’s a strong sign that Micron’s run isn’t over yet. That has turned out to be true so far in Q2, as the memory chip demand hasn’t eased up at all. This is causing Micron’s core products’ price to soar, allowing it to generate record amounts of revenue and profits.
Despite this, Micron’s stock isn’t all that expensive at 16 times forward earnings, but because it’s a cyclical company, it will always trade at a discount to the broader market. If the memory chip shortage lasts for a while, this could still be a great price to pay, and following Appaloosa’s lead is a smart idea.
Alphabet
Alphabet is Appaloosa’s third-largest holding, but it actually sold a handful of shares during Q1 (it decreased its stake by 3%). That’s not a major sale, and follows the pattern of Appaloosa trimming this holding over the past few quarters. Alphabet has been a phenomenal investment over the past year, and using some of the profits to fund investments elsewhere is a smart move. However, Appaloosa and Tepper haven’t entirely sold out of this position, so there’s still clearly upside left.
The biggest growth engine for Alphabet has also been its cloud computing platform, Google Cloud. Google Cloud saw revenue growth of 63% in Q1, with a huge boost coming from sales of its TPUs. That’s a new revenue stream for Alphabet, and it could help sustainably grow its Google Cloud revenue. While Alphabet is no longer the cheap stock it once was, it’s still a strong grower with the potential to amply reward investors. As a result, billionaire-run hedge funds like Appaloosa Management have a hefty stake in the business.
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Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Micron Technology. The Motley Fool has a disclosure policy.