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Massive Moves: Two Sigma’s Strategy Shifts in AI and Energy Stocks
Wall Street is buzzing with constant data releases every quarter, making it easy for important information to get overlooked. With many companies sharing their earnings results and economic reports coming in regularly, critical developments can sometimes be missed.
For instance, a significant report released in mid-August may have gone unnoticed by some investors, which could be among the most crucial updates from the third quarter.
Image source: Getty Images.
Institutional investors managing over $100 million must submit a Form 13F to the Securities and Exchange Commission within 45 days after each quarter. This form reveals the stock trades of top money managers, offering insight into their latest moves (in this case, from the second quarter).
Though not always timely, 13Fs present key data on what stocks interest Wall Street’s leading investors. The second quarter was particularly active for Two Sigma Investments, managed by billionaires John Overdeck and David Siegel, who oversee $43.9 billion in assets. They opened, closed, and adjusted many positions, but two stocks in particular have drawn attention.
Two Sigma’s Growing Investment in AI Leader Nvidia
During the second quarter, while many top funds reduced their investments in the tech sector, Overdeck and Siegel notably increased their stake in AI powerhouse Nvidia (NASDAQ: NVDA). They acquired 534,842 shares, boosting their position by 39% from the prior quarter.
Nvidia’s market cap has surged over $3 trillion in 2023, largely due to its control of the AI-graphics processing unit (GPU) market. Analysts from TechInsights report that Nvidia supplied 98% of GPUs shipped to enterprise data centers over the last two years. The high demand, fueled by backorders for its H100 and upcoming Blackwell chips, keeps Nvidia in a strong competitive position.
This dominance allows Nvidia to price its Hopper chips between $30,000 and $40,000, leading to a significant increase in gross margins. Its CUDA software platform also strengthens customer loyalty by maximizing the performance of its GPUs.
However, it’s worth noting that Nvidia’s rapid rise may not be sustainable. Historically, new technologies often experience bubbles before maturing. Many businesses are still unsure how to profit from their AI investments, suggesting that there may be high expectations for this technology that could not be realized.
Furthermore, Nvidia faces increasing competition from other AI-GPU providers, which might pressure its pricing and market share in the future.
While Overdeck and Siegel expanded their investment in Nvidia, they simultaneously reduced their holdings in a favorite stock of Warren Buffett.
Image source: Getty Images.
Two Sigma Cuts Back on Occidental Petroleum
Warren Buffett’s Berkshire Hathaway has invested heavily in shares of Occidental Petroleum (NYSE: OXY), making it one of Buffett’s top picks, having purchased over 255 million shares since 2022. However, Overdeck and Siegel have taken a different approach.
In the second quarter, Two Sigma sold 1,619,124 shares of Occidental, lowering their stake by nearly 45%. This move hints at a belief that energy prices might decline, as many factors influence the value of energy commodities.
Supply and demand dynamics play a crucial role. Although the pandemic led to reduced investments in energy, causing prices to rise, the potential for a recession could change the outlook. Historically, economic downturns lead to drops in commodity prices, and recent signs such as a decline in the U.S. M2 money supply and prolonged yield curve inversions suggest a slowdown may be approaching.
For Occidental Petroleum, oil prices are vital. Though the company has mechanisms to cope with price fluctuations through its chemical operations, the bulk of its revenue hinges on drilling performance. Rising prices benefit Occidental significantly, but falling prices can lead to tougher financial conditions.
As the investment landscape changes, it remains to be seen how these strategic shifts will affect Two Sigma’s overall performance in the ongoing market volatility.
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Occidental Petroleum: A Challenging Financial Landscape Ahead
Analysts Raise Concerns Over Debt Levels
Overdeck and Siegel have reservations regarding Occidental Petroleum’s financial health. Since its acquisition of Anadarko five years ago, the company has cut its net debt roughly in half. However, it still faces a substantial net debt of $18.4 billion, having only decreased this amount by about $1.3 billion in the last year ending June 30. This situation leaves Occidental with less financial flexibility compared to many leading energy firms.
If oil prices hover above their historical averages, Occidental Petroleum could find itself in a promising position. However, if external pressures arise in the oil market, investors, including Warren Buffett’s Berkshire Hathaway, might encounter significant challenges.
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Sean Williams holds no positions in any mentioned stocks. The Motley Fool is involved with and recommends Berkshire Hathaway and Nvidia and also recommends Occidental Petroleum. For further details, refer to their disclosure policy.
The opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
