Billionaire hedge fund manager Israel Englander co-founded Millennium Management in 1989 with a $35 million investment. Millennium currently manages more than $70 billion in assets and is one of the world’s largest hedge funds. Englander has a strong track record and is one of the best investing minds in the game. That’s why investors are concerned about Millennium’s quarterly 13F filings, documents required by the Securities and Exchange Commission (SEC) to disclose a fund’s holdings.
Investors need to understand that Millennium is a “pod shop.” This means that Millennium allocates capital to different teams (or “pods”) with their own strategies and great autonomy. Therefore, the investment in Millennium may not have been at the direct command of the English. But as CEO, Englander still has some control and is likely to be involved in key hiring decisions, so he certainly trusts his portfolio managers. So don’t blindly follow these managers. However, it can serve as a source for finding new ideas or confirming investment theories.
In the third quarter, Millennium sold a majority stake in artificial intelligence (AI) company Nvidia. (NVDA -3.22%) and palantir (PLTR 4.87%) And he bought new stocks that Wall Street thought would rise.
Sell your AI darling
Millennium isn’t the only major fund to sell chipmaker Nvidia and analytics platform Palantir — this is definitely a trend in the third quarter. Millennium sold 13% of its Nvidia stock in the third quarter, but still owns 11.15 million shares and put and call options. Although Millennium has sold 90% of its Palantir shares, it is likely to increase its call and put options on the company’s stock, potentially creating a straddle option strategy. In a market that many consider overbought and frothy, this selloff appears to be more of a valuation call. The market has been surging over the past two years, primarily driven by themes such as technology, growth, and AI.
NVDA PE Ratio Data by YCharts
As we saw above, these are astronomical valuations despite AI’s ability to disrupt life as we know it. While I don’t think institutional fund managers doubt the potential of AI, an important but difficult lesson for investors is that valuation matters. Even the best business with limitless potential can turn out to be a bad buy if purchased at a very high valuation. On the other hand, distressed companies with large amounts of debt may be able to generate significant investment if acquired at a sufficiently low valuation.
It’s hard to abandon a business you believe in, but sometimes it may be the right thing to do. When a stock is trading at a high price, the margin for error is small, even if the business is doing well. For example, NVIDIA’s third-quarter earnings report showed revenue nearly doubling year-over-year, but the company’s stock price fell the next day after unimpressive guidance.
New and exciting EV play
Millennium bought more than 3.2 million shares of electric aircraft manufacturer Archer Aviation during the third quarter. (ACHR 4.50%) With a total of approximately $9.8 million, Millennium became the 11th largest shareholder.
Archer is one of two companies that are introducing commercial air taxis in some U.S. cities to ease traffic congestion. The company’s Midnight electric aircraft is capable of continuous flight of 20 to 50 miles with minimal charging time and can carry up to four passengers in addition to the pilot. It is also believed that noise is kept to a minimum.
Archer has already achieved several important regulatory milestones, including receiving final airworthiness standards from the Federal Aviation Administration (FAA) and conducting 400 test flights ahead of schedule. In August, Archer also announced plans for an air taxi network in Los Angeles that would replace one- to two-hour drives with 10- to 20-minute flights. The company also signed a deal with Southwest Airlines to develop its network. Although the timing is uncertain, it is not inconceivable that commercial flights and networks could begin operating in some cities in 2025.
Wall Street seems to like the company’s plans, with the average price target of the four analysts covering the stock at $9.38, implying an 88% upside from current levels. The most bullish analyst has a price target of $12.50, implying an upside of 151%. Understand that investing in a stock like Archer Aviation is the equivalent of investing in a late-stage startup. The company is not yet profitable. However, the risk-reward relationship is favorable, so investors can potentially make significant gains if things go well. If Archer takes off, it could capture a large share of a potentially lucrative market.
Bram Berkowitz has no position in any stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.