David Tepper Has 5% of His Portfolio in This Little-Known Energy Stock. Here's Why.

Written by Stefon Walters for The Motley Fool->

Appaloosa Management's top seven holdings are all tech companies, except for Vistra.

Vistra has signed long-term power supply deals with big tech companies like Meta Platforms.

Vistra finished the first quarter with net income of around $1.03 billion, after operating in the negative last year.

Billionaire David Tepper made the bulk of his fortune investing on Wall Street, so it's understandable that people would peek into his hedge fund's holdings to get a look at where he's placing his bets. As of the first quarter (Q1), Tepper's hedge fund, Appaloosa Management, had $5.93 billion in assets under management, with a surprising amount of that coming from a little-known energy company.

Vistra (NYSE: VST) was 5.12% of Appaloosa's portfolio, its seventh-largest holding. The six above it are Amazon, Micron, Alphabet, Uber, Taiwan Semiconductor Manufacturing, and Alibaba, all of which fall into the tech bucket.

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So, why are Tepper and Appaloosa so high on Vistra? Let's take a look.

Vistra is an energy company that makes money in two main ways. The first is through retail, supplying power to around 5 million residential, commercial, and industrial customers.

The second is through power generation, which involves producing large amounts of electricity (about 44,000 megawatts) and selling it to major U.S. power grids. Its fleet is powered by natural gas, nuclear, coal, solar, and battery energy storage.

Tepper and Appaloosa likely increased their stake in Vistra because of its power generation business, and it (surprisingly) comes back to artificial intelligence (AI).

Except for Uber, the companies making up more of Appaloosa's portfolio than Vistra are all AI stocks, ranging from cloud to hardware to manufacturing. Vistra is not an AI stock, but it's positioned well to benefit from the ongoing AI boom.

Data centers house the infrastructure needed to run AI. However, it takes tons of power to keep them running 24/7, as they need to handle the workload. Many people would argue it takes too much power, but in Vistra's case, it has worked in its favor.

As AI hyperscalers (companies that own the infrastructure) collectively spend hundreds of billions building out data centers, they're locking in with companies like Vistra to ensure they have the power to supply them. Just earlier this year, Vistra and Meta Platforms announced a 20-year power purchase agreement. It's hard not to think that helped Tepper's decision to double down on the stock.

Over the past 12 months, Vistra's stock has been down around 12% (as of July 22), so it hasn't experienced the AI-fueled growth that many other AI-adjacent stocks have. However, this could be Tepper getting ahead of the curve.

Last year, in Q1, Vistra operated with a $268 million loss. That same quarter this year, its net income was $1.03 billion. It's not the $1.84 billion it generated in Q3 2024, but it shows promise that it can head back in that direction.

VST Net Income (Quarterly) data by YCharts

Vistra hasn't necessarily reaped all the benefits from the AI windfall just yet, but I like the position it's currently in. However, the stock's volatility isn't for everyone. I wouldn't touch it if you're risk-averse.

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Stefon Walters has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Micron Technology, Taiwan Semiconductor Manufacturing, Uber Technologies, and Vistra. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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