Over the last two weeks, investors have witnessed volatility akin to the COVID-19 crash of February-March 2020, as well as during the height of the financial crisis in 2008. On one end of the spectrum, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all logged their largest individual point gains on April 9 since their respective inceptions.
Conversely, these indexes have endured some of their largest nominal point declines on record following President Donald Trump's April 2nd Liberation Day tariff announcement.
Image source: Getty Images.
Although history has shown that outsized volatility tends to create phenomenal buying opportunities for patient investors, some of Wall Street's brightest money managers appear to have seen these warning signs for the stock market well in advance.
In particular, select billionaire investors sold shares of three incredibly popular but pricey stocks ahead of Wall Street's record-setting bout of volatility.
Palantir Technologies
The first pricey but cutting-edge stock that billionaires were jettisoning prior to Wall Street's wild vacillations is artificial intelligence (AI)-driven data-mining specialist Palantir Technologies(NASDAQ: PLTR).
Billionaire Philippe Laffont, who oversees close to $29.7 billion in assets at Coatue Management, dumped more than 4.81 million shares of Palantir during the second quarter of 2024. It's a similar story for Duquesne Family Office's billionaire chief Stanley Druckenmiller, who sold more than 728,000 shares of Palantir after March 31, 2024.
On the surface, Palantir has a lot to offer. Both of its AI-powered software-as-a-service platforms, Gotham and Foundry, are irreplaceable at scale. Additionally, Gotham tends to lock in contracts with federal governments spanning four or five years, while Foundry is a subscription-based model that incents business loyalty. This is to say that on top of Palantir having a sustainable moat, its cash flow tends to be highly predictable.
However, there's a degree of near-term growth uncertainty hovering around Palantir at present. President Trump's efforts to rein in federal spending are casting doubt on what the defense budget might look like over the coming four years. Gotham relies heavily on contracts from the U.S. government.
The Atlanta Federal Reserve's GDPNow forecast is also calling for the steepest contraction in organic gross domestic product (GDP) for the U.S. economy (excluding the COVID-19 quarters) since the tail-end of the Great Recession -- a 2.4% decline, based on an April 9 update. This suggests the commercially focused Foundry segment might endure subpar subscription growth in the coming quarters.
But what's really been a hard pill to swallow is Palantir's valuation. During previous technology and next-big-thing innovation bubbles, leading-edge businesses peaked at price-to-sales (P/S) ratios in the neighborhood of 30 to 40. Palantir stock traded at roughly 100 times sales when it hit its all-time closing high less than two months ago. Even after a modest pullback, Palantir is still commanding a P/S ratio of 75, which is a level that's never been sustainable throughout history.
Image source: Getty Images.
Nvidia
Palantir wasn't the only ultra-popular AI stock that was largely shown the door ahead of Wall Street's historic volatility. Semiconductor kingpin Nvidia(NASDAQ: NVDA) is a juggernaut that four billionaire money managers sent to the chopping block:
Between the first quarter of 2023 and end of 2024, Philippe Laffont dumped close to 39.8 million split-adjusted shares (Nvidia conducted a 10-for-1 forward split in June 2024).
David Tepper of Appaloosa Management sold nearly 9.6 million shares of Nvidia between the end of the third quarter of 2023 and Dec. 31, 2024.
Stanley Druckenmiller dumped Duquesne's entire stake of 9.5 million shares since the second quarter of 2023.
Likewise, billionaire Stephen Mandel of Lone Pine Capital sold all of his fund's roughly 6.4 million shares since the second quarter of 2023.
What made Nvidia such a popular stock to own is its near-monopoly share of the graphics processing units (GPUs) that act as the brains in AI-accelerated data centers. Nvidia's Hopper (H100) and next-generation Blackwell GPUs are what power AI solutions, as well as the training of most large language models.
But the dicey thing about next-big-thing trends is they've all worked their way through an early stage bubble-bursting event over the last 30-plus years. Dating back to the advent of the internet in the mid-1990s, every game-changing innovation has eventually failed to meet investors' lofty expectations. All technologies need time to mature, but investors consistently overestimate early adoption rates and/or utility. If the AI bubble bursts, Nvidia stock would almost certainly be hit hard.
Nvidia also faces the threat of growing internal competition. Many of its top customers by net sales are developing AI-GPUs and solutions of their own to use in their data centers. While this hardware isn't a threat to the superior computing speed of Nvidia's AI-GPUs, it is notably cheaper and more accessible. This is a recipe for Nvidia to lose out on valuable data center real estate, and for its gross margin to decline.
Though Nvidia isn't pricey relative to its forward-year earnings, it is still valued at a P/S ratio of 21. While this is down 50% from its P/S ratio of 42 last summer, it's still more than double the P/S ratios of its "Magnificent Seven" peers.
Chipotle Mexican Grill
The third pricey stock billionaire money managers were sellers of prior to Wall Street's wild volatility is fast-casual restaurant chain Chipotle Mexican Grill(NYSE: CMG).
During the December-ended quarter, Coatue's Philippe Laffont completely exited his fund's stake in Chipotle by selling nearly 4.6 million shares. Additionally, billionaire Bill Ackman of Pershing Square Capital Management axed close to 16.6 million split-adjusted shares throughout 2024. The "split-adjusted" aspect takes into account that Chipotle Mexican Grill effected a 50-for-1 forward split in June.
Like the other companies listed here, Chipotle presents with competitive advantages that have made it a popular stock to own. Its use of responsibly raised meats and locally sourced vegetables (when possible) speaks to consumers who prefer organic and natural foods. Plus, using only fresh ingredients and keeping its menu relatively small allows staff to quickly prepare meals and keep the queue moving.
Furthermore, Chipotle's introduction of mobile-dedicated drive-thru lanes (known as "Chipotlanes") prior to the pandemic led to an entirely new source of revenue for the company.
But it's not all peaches and cream, or should I say avocados and beans, for Chipotle.
While it's benefited from the willingness of consumers to pay a higher price for organic and natural foods, there comes a point where inflationary pressures begin to weigh on the company's margins and/or its customer base. During the December-ended quarter, the company's comparable restaurant sales growth clocked in at only 5.4%. This is well below its historic average, which potentially signals that inflationary pressures are hitting home.
To stay consistent with this list, the other prime concern for Chipotle Mexican Grill is its valuation. Its forward price-to-earnings (P/E) ratio of 33 is aggressive considering half of its sales growth is coming from the opening of new stores. With organic growth from existing stores hovering in the 5% to 7% range, and the scope of innovation somewhat limited for restaurants, a forward P/E of 33 arguably prices Chipotle stock for perfection.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
