NVDA sold! Guru Bets BIG on Small Caps Surge.
Long time love affair.
Legendary investor, Stanley Druckenmiller recently majority stake of his $NVIDIA Corp(NVDA)$ stocks and made a killing, in the process.
The former hedge fund manager first invested in Nvidia for his portfolio at his Duquesne Family Office since late 2022.
Following OpenAI launch of ChatGPT (30 Nov 2022), Mr Druckenmiller added significantly to his position.
In 2023, he continued building up his position almost every quarter, with stock and call options.
By end 2023, Nvidia represented over 16% of his portfolio. (see above)
Total investment was nearly $550 million in the artificial intelligence (AI) chip leader.
His big bet continued to pay off from early 2024 as Nvidia stock climbed higher and higher.
As the share price topped $900 level, Druckenmiller said, in a CNBC interview - a lot of what he recognized (as potential, as value) has become recognized by the marketplace now.
FYI, his Nvidia stake has increased his portfolio value by > $1 billion in Q1 2024 alone, up from about $3.4 billion at end of FY2023.
I supposed that explained why he decided to sell some of his shares and all of his call options.
And it is perfectly “fine”.
Big on Small !
With the profits “safely” in the pocket, he is now betting on small companies ("small caps") because they have not been doing as well as larger companies lately, he believes.
As of the end of Q1 2024, Druckenmiller's biggest position was call options on the $iShares Russell 2000 ETF(IWM)$.
He held about $664 million worth of options as of end March 2024.
What is IWM$?
iShares Russell 2000 ETF is a simple index fund that tracks the Russell 2000. (see above)
The ETF consists of the 2,000 smallest companies in the Russell 3000.
It is the most commonly used index to track small-cap stocks.
Why Small Caps?
First and foremost, small cap stocks have lagged behind their larger peers, as mega caps (eg. Nvidia, Microsoft etc…) fueled rally the mainboard indexes to all time highs.
Small caps might be a good investment because they're historically cheap and could outperform larger companies in the future.
While the Dow and S&P 500 indexes have been charting new highs in 2024, the Russell 2000 haven’t surpassed its peak reached back in 2021.
It's still -14% below that peak. Minimally, there is this 14% potential.
Small caps stumbling blocks.
(1) Debt refinancing risks.
Companies in the Russell 2000 hold a total of $832 billion of debt.
According to Bloomberg, 75% of debt, needs to be refinanced by 2029.
In contrast, just 50% of debt obligations from the S&P 500 companies are due by then.
Indirectly, this increases the “risk” for small caps companies due to refinancing risks and possibly investors’ aversion to small caps due to risk factor (just mentioned) and valuation.
(2) US economy.
Small-cap stocks are more sensitive to economic downturns.
It's easier for a large company to survive a recession than a small one.
With recession fears at an all time high in 2022 & 2023, these companies definitely felt the pain.
(3) Interest rate sensitivity.
Smaller businesses more likely to take on floating-rate debt instead of issuing fixed-rate bonds.
As a result, they have been beaten down in this elevated & prolong high interest rate environment.
All is not lost though.
With the Fed expected to start cutting interest rates later this year, the hopes of a “soft” landing or “no” landing are increasing.
That is a welcome news for small-cap investors, and Mr Druckenmiller counts himself among them.
Small Caps’ Time ?
Case for investing in small caps:
Will you be surprised to find that “small caps historically outperform in the long run“, despite their subpar performance in 2022 & 2023,
This is because smaller companies' stocks demand a greater risk premium because they're more likely to face hardships amid economic downturns or changes in their industry.
After a long period of underperformance, valuation gap between small and large caps is at one of the lowest levels it's seen in decades.
The Russell 2000 stocks are much cheaper relative to their sales compared to the S&P 500 stocks.
The forward price-to-earnings (P/E) ratio of the small-cap S&P 600 index (that tracks only profitable businesses) is 30% lower than the S&P 500.
These are levels not seen since the early 2000s.
Last time when the P/E gap was this wide, small-cap stocks outperformed large-cap cousins for the next few years.
Emulate Druckenmiller ?
You can invest in a small-cap ETF like the one he bought.
Alternatively, investor could also focus on small companies (also known as "small-cap value stocks") that are considered good values.
In the past, they have performed better than the overall market.
Other ETFs that target “small-cap value stocks” includes (a) $Vanguard S&P Small-Cap 600 Value ETF(VIOV)$ or $AVANTIS INTERNATIONAL LARGE CAP VALUE ETF(AVIV)$.
My viewpoints: (mine only)
Did Mr Druckenmiller sell his Nvidia majority stake a little too early?
Nvidia’s latest quarter revenue of $26 billion, was +427% gain YoY.
On top of that, Nvidia has announced a 10-for-1 stock split.
Wonder how many additional “bonus” shares would Mr Druckenmiller get for “sold” stake.
Did you noticed that most veteran investors make use of (a) stocks and (b) options when trading.
Does these practices resonate with you as an individual investor?
The iShare Russell 2000 ETF at $206.58 per unit, is definitely not cheap by any means.
Thus making me wonder — why not just focus on the mega cap stocks instead?
Cut out the hassle; not unless the rate of returns are much higher and attractive than its mega cap cousins?
Overall, Druckenmiller thinks small companies are a good investment, and the evidences seemed to support his view.
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Do you think Mr Druckenmiller is right about Small Cap stocks and ETFs catching up the mega caps by 2024 year end ?
Do you think the Fed’s first interest cut will set Small Cap stocks on the road to recovery ?
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