Important data releases aren't hard to come by on Wall Street. Every quarter, hundreds of the most influential publicly traded companies lift the veil on their latest operating results during earnings season, while economic data releases occur almost daily. It can be easy for something important to fly under the radar.
For example, some investors probably missed what just might be the most paramount of all data dumps of the third quarter in mid-August.
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No later than 45 calendar days following the end to a quarter, institutional investors with at least $100 million in assets under management (AUM) are required to file Form 13F with the Securities and Exchange Commission. A 13F allows investors to look over the shoulders of Wall Street's top money managers to see which stocks they've purchased and sold in the latest quarter (in this instance, the second quarter).
While 13Fs aren't perfect -- since they're filed up to 45 calendar days after the end to a quarter, they may provide a stale snapshot of what a fund owns -- they offer a concise way of deciphering which stocks are piquing the interest of Wall Street's smartest money managers.
The June-ended quarter was a particularly busy one for billionaires John Overdeck and David Siegel, who oversee $43.9 billion in AUM at Two Sigma Investments. Hundreds of positions, including put and call options, were opened, closed, added to, and reduced during the second quarter.
But it's Overdeck's and Siegel's trading activity in two of Wall Street's buzziest stocks that's raising eyebrows.
Two Sigma's stake in AI leader Nvidia is climbing
Though Two Sigma's brightest investment minds, which include John Overdeck and David Siegel, were buyers of most high-profile tech companies during the June-ended quarter, it's their purchasing activity in artificial intelligence (AI) titan Nvidia(NASDAQ: NVDA) that jumps off the page.
During the second quarter, more than a half-dozen billionaire money managers reduced their fund's respective stakes in Nvidia. But only a select few billionaire investors added to their existing position. Overdeck and Siegel oversaw the purchase of 534,842 shares of Nvidia in the second quarter, which increased Two Sigma's position by 39% from the March-ended quarter.
The reason Nvidia has gained more than $3 trillion in market value since the start of 2023, and the probable catalyst behind Two Sigma's sizable purchase, is its early stage monopoly of AI-graphics processing units (GPUs). The semiconductor analysts at TechInsights estimate that Nvidia accounted for 98% of the GPUs shipped to enterprise data centers in 2022 and 2023. With orders for its H100 GPU (commonly known as the "Hopper") and successor Blackwell chip backlogged, it doesn't appear as if Nvidia will be ceding its monopoly like market share anytime soon.
Having its AI-GPUs be the preferred choice of businesses wanting to operate AI-accelerated data centers has its perks. Most notably, Nvidia has been able to price its Hopper chip between $30,000 and $40,000, which represents a premium of 100% to 300% over rival AI-GPUs. Commanding a higher price point with minimal drop-off in demand has led to a surge in the company's gross margin.
Nvidia's CUDA software platform has also done an excellent job of complementing its hardware and keeping customers tied to its ecosystem. CUDA is the toolkit developers use to train large language models and maximize the computing potential of their Nvidia GPUs.
But as I've argued recently, Nvidia's historic ascent may not last. Every next-big-thing innovation and technology for three decades (and counting) has required time to mature and endured an early stage bubble. Considering that most businesses lack a clear plan for how they'll monetize and generate a positive return on their AI investments, it would appear that investors have, once again, overestimated the early adoption and utility of a new technology (artificial intelligence).
Nvidia won't be the only company providing AI-GPUs for enterprise data centers moving forward, either. Even if it sustains its computing edge, lower price points from external competitors, coupled with rapidly growing internal competition, could reduce AI-GPU scarcity and negatively impact the pricing power that Nvidia holds so dear.
But while Overdeck, Siegel, and their investment team, were busy piling into Nvidia during the June-ended quarter, they were sending shares of a Warren Buffett favorite to the chopping block.
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Overdeck and Siegel slashed their fund's stake in one of Warren Buffett's favorite stocks
Although no stock has been purchased more by Berkshire Hathaway's Warren Buffett than shares of his own company -- close to $78 billion in cumulative buybacks since July 2018 -- energy giantOccidental Petroleum(NYSE: OXY) clocks in as the clear No. 2. Buffett and his team have purchased north of 255 million shares of Occidental since 2022 began.
However, it's a different story for Two Sigma's billionaire co-founders. During the second quarter, they and their investment team disposed of 1,619,124 shares of Occidental Petroleum, which slashed Two Sigma's stake by almost 45%.
The most logical reason to sell shares of an oil and gas stock is you believe the spot price of the underlying energy commodities will fall. Though multiple years of capital underinvestment by global energy majors during the COVID-19 pandemic provided a lift to the spot price of crude oil, there are reasons to believe this trend can reverse.
At the end of the day, supply and demand matter for energy commodities. Even with potentially constrained supply, concerns about a U.S. or global recession can lower the spot price of crude oil. Within the U.S., the first notable drop in U.S. M2 money supply since the Great Depression, coupled with the longest yield curve inversion in history, have historically foreshadowed trouble for the U.S. economy. The spot price of oil almost always declines when economic downturns take shape.
The spot price of oil is particularly important for Occidental Petroleum. Even though it's an integrated energy company, and is able to partially hedge spot price weakness with its downstream chemical operations, the lion's share of its operating margin and revenue is tied to its upstream drilling segment. When prices climb, Occidental enjoys an outsized benefit, relative to other drillers. But when prices fall, its operating cash flow will be hit harder than its peers.
It's also possible that Overdeck and Siegel aren't thrilled with Occidental Petroleum's balance sheet. In the five years since acquiring Anadarko, Occidental has roughly halved its net debt. Nevertheless, the company is still contending with $18.4 billion in net debt and has only reduced its net debt by about $1.3 billion over the trailing year, ended June 30. In other words, it lacks the financial flexibility of most top-tier energy companies.
If the spot price of oil remains above its historic average, Occidental Petroleum should be positioned for success. But if one or more external forces pressures the oil market, shareholders, including Warren Buffett's Berkshire Hathaway, could be in for some choppy waters.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Nvidia. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
