The California Public Employees’ Retirement System, known as CalPERS, manages the largest pension fund in the U.S. Its portfolio of stocks, private debt and equity, bonds, real estate, and other investments totals $452.3 billion. And it’s responsible for the retirement benefits for nearly 3,000 public employers in the state of California. So, the moves made in the fund portfolio aren’t to be taken lightly.
Well, CalPERS just added shares to two of its largest holdings in the third quarter, Tesla (TSLA -0.19%) and Nvidia (NVDA 0.94%). Should you follow in CalPERS footsteps? Or might there be some alternate options from stocks that compete with these two choices and also perform well?
Betting big on electric vehicles
California is known as a leading state in the push toward getting more electric vehicles (EVs) on the road, so it’s understandable that it’s putting its money where its mouth is.
The fund increased its stake in Tesla by 34% in the third quarter, and it’s nearly tripled its position in 2023. That said, it trimmed its position at the end of last year, which means it missed out on some of Tesla stock’s great run in 2023 so far.
Tesla isn’t the only EV maker CalPERS is buying. It also increased its stake in Rivian by 28%. It had been selling off shares after a big purchase in the third quarter last year, but it reversed course in the most recent quarter.
Unfortunately, neither purchase has worked out particularly well for CalPERS. Tesla shares are down around 6% while Rivian dropped nearly 32% since the end of the third quarter. Meanwhile, the S&P 500 is up around 5%.
Tesla disappointed investors with its third-quarter earnings report. Pricing pressure has cut into its gross margin, leading to weak bottom-line growth for the EV leader. And while Rivian’s earnings were better than expected, it disappointed investors when it announced plans to raise debt due to higher cash-burn rates than expected in October.
So, now could be a great time to get in on Tesla or Rivian at a price below where CalPERs bought them last quarter. But one EV stock could be better than either, and CalPERS doesn’t hold shares in it at all.
BYD (BYDD.F 0.28%) (BYDDY 0.17%) is outperforming both American car companies thanks to its leading position in the fast-growing Chinese market for electric vehicles. And while Tesla is feeling the pressure from price cuts, BYD is actually expanding its gross margin. Not to mention, the Chinese company trades at a much more attractive valuation than Tesla. You can pick up BYD for just 1.1 times sales versus 8.5 times sales for Tesla.
All in on AI
One of the hottest sectors in the market is artificial intelligence (AI). Just about every company is talking about how they can use AI to improve their operations. And one company benefiting greatly from the massive amount of spending enterprises are putting into AI is Nvidia.
Nvidia’s graphics processing units (GPUs) are essential hardware for training the large language models that form the basis of generative AI applications. And CalPERS has been buying up shares of the stock. It added 31% to its existing stake last quarter, and the number of shares it holds has tripled since the start of the year.
Nvidia’s stock price performance this year has been nothing short of incredible. It’s up nearly 240% year to date, flying past the $1 trillion market cap milestone. It’s up another 14% since the end of the third quarter, too.
But expectations for Nvidia are extremely high. Its forward P/E ratio is at about the same level it was at the start of the year, suggesting investors think it can keep growing at the same rapid pace it did this year for a while longer. Analysts currently expect Nvidia to more than quadruple its earnings from a year ago in the second half of fiscal 2024, and they expect another 60% increase in earnings next year.
If Nvidia falls short in any way, it’ll put tremendous pressure on the stock price due to its high valuation.
Meanwhile, supply chain constraints are improving for Nvidia’s foundry partner, Taiwan Semiconductor Manufacturing (TSM 0.19%), known as TSMC. That means two things for Nvidia. First, it won’t be able to charge a significant premium for its chips, leading to lower gross margin next year. Second, TSMC will be able to produce more chips for competing chip designers, including practically all of the Big Tech companies (Nvidia’s biggest customers) now designing their own chips for AI training.
At this valuation, it might be smart to trim Nvidia from your portfolio and invest in a semiconductor stock trading at a less precarious value such as TSMC.
Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends BYD, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.