Billionaire David Tepper has taken big stakes in some of the best known companies on earth. He’s bet 14.1% of his portfolio on Alphabet, 12.0% of it on Amazon, and 8.7% on Meta. Surprisingly though, none of those tech bellwethers eclipse his top holding in a single energy company, Constellation Energy. He’s put an astonishing 16.1% of his portfolio into this one energy stock, and we wanted to know why.
The first place we looked was the dividend. Billionaires love to earn passive income from simply holding stocks, and David Tepper may be no different. After all, what do we know about the most famous billionaire investor of all, Warren Buffett, if not that he has a penchant for holding stocks that pay dividends, even if he doesn’t offer one to Berkshire shareholders.
But surprisingly, the dividend rabbit hole wasn’t the answer. Constellation Energy pays a paltry dividend of 0.68%. So there must be some other reason why he snapped up so many shares of Constellation?
A Tipping Point for Constellation Energy
As we looked through the financials, the answer became much clearer. It seems Tepper has spotted an inflection point for Constellation.
Skipping past the most recent four quarters, the top line revenues were downright unimpressive. Many quarters had so-so revenues that oscillated from modest declines to small gains. For example, the final quarter of 2020 showed a year-over-year decline of 6.7% while a couple of quarters later, revenues popped 7.0% year over year. In short, there was nothing to write home about.
But that all changed in the past year. Here’s what jumped off the page in the last year. The most recent two quarters have seen management report stellar revenue growth.
In the June 2022 quarter, revenues grew by 31.6% and the subsequent quarter was even more impressive when revenues spiked higher (yoy) by 37.3%. That’s evidence of a potential tipping point in Constellation Energy revenues, and if Tepper has spotted the inflection point, he likely knows what’s coming…
Much higher profits.
If management can turn those higher revenues into higher earnings and they are sustained, Wall Street will pay a much bigger premium for Constellation shares than are currently being paid.
The story may not have gone entirely unnoticed. Indeed when we evaluated analysts’ consensus target for the share price, we saw fair value of just under $100 per share, suggesting the Street expects close to 17% gain in shares to fair value.
Billionaires Go All In On Energy
Sometimes investing is about connecting the dots, and one trail of breadcrumbs that should not be ignored at this time is how many billionaires are scooping up shares of energy companies. Buffett has his fair share of Occidental Petroleum and Chevron, Druckenmiller has 5.7% of his portfolio in Chevron too. And a whole host of other renowned investors have followed suit. Now we uncovered another tidbit of information, Tepper has bet heavily on Constellation. Why?
The most obvious answer is sometimes the right one, and in this case our bet is that all these billionaires have studied the stagflation ’70s and spotted how well oil companies did back then. They’re betting, in our view, that inflation is not transitory but in fact will persist for some time, and that energy companies will prosper much longer than most realize.