Whether you’re a relatively new investor or someone who’s been putting their money to work on Wall Street for decades, you’re probably aware of just how overwhelming the number of data releases can be. Between thousands of public companies reporting their operating results each quarter and economic data being released daily, it can be easy to miss something important.
For example, Aug. 14 marked the deadline for institutional investors with at least $100 million in assets under management (AUM) to file Form 13F with the Securities and Exchange Commission. A 13F offers a clear and easy-to-understand snapshot of which stocks Wall Street’s brightest and most-successful money managers bought and sold in the latest quarter. In this instance, the Aug. 14 filing date corresponds with trading activity ending in the June quarter.
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Although 13Fs aren’t perfect — since they’re filed up to 45 calendar days following the end to a quarter, they can provide stale information for active hedge funds — they can still offer useful clues as to which stocks, industries, sectors, and trends are enticing Wall Street’s top investors.
While Warren Buffett is easily the most-followed of all billionaire asset managers, there are a number of other billionaires whose moves are closely watched by smart investors. This includes billionaire Cliff Asness of AQR Capital Management. Asness oversees more than $65 billion in AUM at the fund he helped co-found.
Among the thousands of trades executed by Asness and his team during the June-ended quarter, perhaps none stands out more than him dumping one of Wall Street’s hottest artificial intelligence (AI) stocks and piling into an ultra-high-yield stalwart that’s been crushing it of late.
The biggest eyebrow-raiser in AQR Capital Management’s portfolio was Asness and his team of advisors showing shares of world-leading chip fabrication company Taiwan Semiconductor Manufacturing(NYSE: TSM) to the door. Over just a three-month stretch, Asness oversaw the sale of 1,411,917 shares of Taiwan Semi, which represents 92% of what AQR held at the end of March.
On the surface, there’s plenty of reason to be excited about Taiwan Semi’s long-term prospects. Businesses are eager to gain first-mover advantages due to the rise of AI, which means plenty of demand from industry leader Nvidia. Taiwan Semiconductor is expanding its chip-on-wafer-on-substrate (CoWoS) capacity at a rapid pace to accommodate added AI-graphics processing unit (GPU) production. CoWoS packaging is necessary for the high-bandwidth memory used in AI-accelerated data centers.
Taiwan Semi is also more than just a company that manufactures AI-GPUs. It’s responsible for producing the lion’s share of the world’s advanced logic chips.
Nevertheless, there are three possible catalysts behind AQR’s big-time selling in Taiwan Semi. The first, and possibly most-logical, is that Asness and his crew were taking profits. Shares have more than doubled over the trailing year on the hope that demand for AI-GPUs won’t slow anytime soon. AQR is an active hedge fund, so seeing Asness and his advisors ring the register isn’t out of the question.
Asness and his team might also have hedged their portfolio ahead of the November election. Even though Taiwan Semi opened a manufacturing plant in Japan earlier this year and is expanding its operations into the U.S., it still generates the lion’s share of its revenue from its home market of Taiwan. The potential for import tariffs or poor trade relations between the U.S. and other countries may have sapped the optimism surrounding Taiwan Semi for AQR’s brightest investment minds.
But the biggest concern of all might just be the possibility of an AI bubble taking shape. Over the last 30 years, investors have consistently overestimated the utility and consumer/business uptake of new technologies and innovations early in their existence.
Put another way, we’ve watched every hyped innovation work its way through an early stage bubble. If this trend were to continue, the AI bubble is eventually going to burst, and this would, undoubtedly, hurt Taiwan Semi’s growth prospects. Not as much as Nvidia, mind you, but potentially enough to make investors think twice about its aggressive earnings multiple.
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With AQR dumping shares of Taiwan Semi, as well as paring down its stake in Nvidia for that matter, you might be wondering what high-growth/innovative company Asness and his advisors piled into instead. What if I told you that one of his fund’s biggest buys of late has been ultra-high-yielding tobacco stock Altria Group(NYSE: MO)?
When June 2023 came to a close, AQR was holding 3,057,215 shares of Altria, the company behind premium tobacco brand Marlboro. But over a 12-month stretch, Asness’s fund had increased its stake by 112% to 6,490,441 shares.
There are pretty obvious downsides to investing in tobacco stocks. Front-and-center is the reality that consumers have become more educated about the potential risks of long-term tobacco use. Data from the Centers for Disease Control and Prevention shows that the adult cigarette smoking rate has declined from around 42% in the mid-1960s to an estimated 11.5% in 2021. A shrinking pool of consumers is, generally, not good news for a company.
But even with Altria fighting this uphill battle, it still has a couple of key catalysts in its sails.
The biggest advantage Altria Group brings to the table is its pricing power. Tobacco contains nicotine, which is an addictive chemical. Altria is able to raise the price of its cigarettes to more than offset any weakness it may be contending with in total shipments.
To add to this point, being the parent company of the most-dominant premium brand (Marlboro) helps when increasing prices. Through the first nine months of 2024, Marlboro has held a nearly 42% share of the domestic cigarette market. Regardless of how well or poorly the U.S. economy is performing, history shows that smokers still purchase cigarettes, which leads to predictable cash flow year after year.
Don’t overlook Altria’s push into smokeless products, either. Last year, it closed a $2.75 billion deal to acquire NJOY Holdings, a maker of electronic-vapor products. Unlike the overwhelming majority of the companies supplying e-vapor products, NJOY received a half-dozen marketing granted orders (MGOs) from the U.S. Food and Drug Administration before it was acquired by Altria. Whereas non-MGO products can be, in theory, pulled from retail shelves at any moment, NJOY’s have clearance to be marketed.
Altria’s valuation and supercharged dividend yield were likely the final selling points. Shares of the company were valued at roughly 8 times forward-year earnings throughout much of the second quarter. Further, its yield had been dancing around the 9% mark, which is considerably higher than what U.S. Treasuries were offering. In hindsight, Asness and his team piling into Altria looks to have been a smart wager.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
