The stock market continues to roar ahead in 2023. The S&P 500 is up 17% year to date and sits only 6% below making a new all-time high. That is one of the prerequisites for an official declaration of a bull market. It has also led to emergence of stocks the smart money is selling.
Yet those gains are being driven by just a handful of stocks. The so-called Magnificent 7 stocks account for virtually all of those gains or nearly 75% of the total. If you remove the performance of the top 10 stocks from the equation, the benchmark index would be flat for the year.
So talk of a bull market may be premature. It could be why the Federal Reserve sees a 66% chance of a recession before the end of the year. Things aren’t quite as rosy as they appear. It may explain why the following three companies are stocks the smart money is selling.
Activision Blizzard (ATVI)
The tie-up between video game leader Activision Blizzard (NASDAQ:ATVI) and Microsoft (NASDAQ:MSFT) hit a few roadblocks. U.K. regulators, For example, objected to the merger on fears Microsoft would have an unfair competitive advantage in online video gameplay.
To help allay those concerns, Microsoft volunteered to sell all the online streaming rights for all of Activision’s existing PC and console games released over the next 15 years to the U.K.’s Ubisoft Entertainment (OTCMKTS:UBSFY).
Warren Buffett bought loads of Activision stock as a merger arbitrage play. Previously Buffett’s Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) owned less than 2% of the video game company’s shares. Afterward, he scooped up enough to hold a 9.5% position.
Yet he began selling his stake in the second quarter. He dumped up to 70% of his holdings, perhaps believing Microsoft would not be able to overcome regulator concerns. So he missed out on some gains when the Federal Trade Commission signed off on the deal. Now that Buffett owns essentially the same amount he did before he began buying, he’s effectively closed out his arbitrage position.
Amazon (AMZN)
Amazon (NASDAQ:AMZN) is one of the surprising stocks that smart money is selling on Wall Street. Share dumping was especially heavy in the first quarter when there was $3.3 billion worth of outflows from Amazon stock by billionaire investors compared to $1.4 billion in inflows.
The biggest seller at the time was Jim Simons at Renaissance Technologies. He completely exited his position in the e-commerce giant, shedding 9 million shares at an average price of around $114 per share. But Terry Smith at Fundsmith also sold 6.7 million shares during the period.
Valuation was likely the key factor in the gurus selling their stock. Amazon has rarely been a “cheap” stock. It currently trades at over 100 times trailing earnings and more than twice sales.
Yet it might be hard to justify those valuations to some based on slowing growth. Retail sales in the second quarter fell by $33 million while Amazon Web Services saw just 12% growth during the period. That’s down from 16% growth in the first quarter and 20% in the fourth.
CEO Andy Jassy said AWS customers were having a difficult time and “needed assistance cost optimizing to withstand this challenging time.”
Although Amazon beat the street on earnings, analysts had dramatically scaled back how much they were forecasting Amazon would make. It was easy for it to step over the lower bar. And may be an easy decision for the smart money to walk away.
Palantir Technologies (PLTR)
Data analytics specialist Palantir Technologies (NASDAQ:PLTR) is a clash between the smart money and the so-called “dumb money” retail investor. Where Citadel Advisors founder Ken Griffin shed 97% of Palantir stock from his portfolio, the small investor was buying them up and running shares higher.
Over the last three months, the stock is up 5% but is 136% higher year to date. It could be Griffin thought it difficult to keep holding the inflated shares. Palantir trades at 56 times next year’s earnings estimates and goes for 85 times the free cash flow it produces. But the business is growing.
Commercial clients continue to expand. The data mining stock counted 302 enterprise clients at the end of the second quarter. That’s up from 280 in the first quarter and 203 a year ago. Wall Street also sees revenue jumping 19% next year and growing 21% in 2025.
Just recently, though, Morgan Stanley (NYSE:MS) downgraded Palantir’s stock. It believes shares are overvalued and there is no clarity on whether the company can monetize its artificial intelligence efforts. However, Palantir CEO Alex Karp told investors that demand for its AI solutions was off the charts. It is in talks with over 300 new enterprises to deploy its AI in their systems.
Interestingly, Morgan Stanley had only recently increased its stake in Palantir by over 56% before downgrading it. According to its latest 13F-HR, the Wall Street firm now owns 18 million shares (of course, it could have sold them since the filing). This makes it one of those stocks the smart money is selling.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
