Self-Made Billionaire Karthik Sarma Sold His Entire Stake in Nvidia and Bought This Incredible Stock Up More Than 100% in 12 Months

Key Points

• Karthik Sarma got his start in Chase Coleman's Tiger Global before starting a hedge fund of his own.

• He likes to hold stocks for a long time, but he's sold out of Nvidia relatively quickly.

• He's now turned his attention to a value stock working on a big turnaround.

• 10 stocks we like better than Nvidia ›

When investor Julian Robertson closed the doors on his hedge fund, Tiger Management, in 2000, he decided to help some of the best and brightest investment managers start hedge funds of their own. The so-called "Tiger Cubs" have gone on to mentor numerous other successful hedge fund managers, and those have in turn produced even more.

The lineage of Tiger Cubs is full of great investors, many of whom have created vast amounts of wealth for themselves and those who bought into their hedge funds. One such investor, Karthik Sarma, got his start at Tiger Cub Chase Coleman's Tiger Global hedge fund in 2001. In 2006, he started his own hedge fund SRS Investment Management. Today, Sarma manages a portfolio of investments worth over $10 billion for himself and his investors, and his net worth has climbed to $2.9 billion.

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Sarma usually likes to hold positions in his favorite companies for the long run. But he recently disposed of a position in Nvidia (NASDAQ: NVDA) after holding at least some of the stock for less than two years. Instead, he's piling SRS' cash into another high-flying stock that's more than doubled in the last 12 months.

Image source: Getty Images.

Taking winnings off the table

Sarma didn't buy into Nvidia super early, but he got into the stock early enough to make a considerable profit. Sarma bought the stock in the second quarter of 2023 when it traded between $26 and $44 (on a split-adjusted basis).

Sarma has since sold off his Nvidia shares in stages, starting in 2024's Q1. His selling appears to be motivated primarily by the rising valuation of the stock. Its forward price-to-earnings (P/E) ratio climbed above 40 in late 2023 and early 2024. A strong outlook at the start of that year from management pushed investors to revise their earnings estimates higher, but they quickly pushed the stock's valuation well above a 40-times forward earnings multiple again by mid-year when Sarma sold more. Nvidia reach a forward P/E of more than 50x at the start of 2025, the quarter when Sarma sold the rest of SRS' Nvidia shares.

Indeed, Nvidia is one of the top chipmakers in the world. It's unlikely that its position as the leading graphics processing unit (GPU) maker will be displaced anytime soon. However, there are some signs that competition could eat into its market share over the next few years as both GPU makers and custom silicon designs displace some of the work Nvidia has come to specialize in.

The sell-off in shares of Nvidia in Q1 appeared to be a great buying opportunity for anyone brave enough to buy the volatile stock amid growing uncertainty. The stock is once again trading at an all-time high. But that also has resulted in its forward P/E once again coming up against that 40-times forward earnings multiple where Sarma has sold the stock. It currently trades around 38 times analysts' estimates for earnings over the next four quarters.

So, instead of buying Nvidia, Sarma has put his fund's cash to work buying a totally different company. It's up 135% in the past year while Nvidia shares are up just 24% as of July 10.

The high-end stock Sarma's buying instead of Nvidia

Sarma's biggest purchase in Q1 is about as far away from the AI industry as it gets. Instead, he's put money into Tapestry (NYSE: TPR), the company behind luxury handbag brands Coach and Kate Spade.

Coach is far and away Tapestry's cash cow. The brand accounted for nearly 80% of sales over the first nine months of fiscal 2025. And it'll play an even bigger role in 2026 following the sale of the Stuart Weitzman brand. Coach is making up for declining sales for Kate Spade and Stuart Weitzman, and producing better profit margins, too.

That said, there's potential for Kate Spade to turn around. Management is strategically closing retail stores and improving inventory management to reduce the number of price reductions. (Tapestry primarily takes a direct-to-consumer approach with its brands, which gives it more control over inventory and pricing.) That should lift profitability for the brand over time. If it can reinvigorate brand growth with international expansion and more strategic store locations, it could produce very strong growth for the company in the future. That said, the Kate Spade brand might not have the pricing power of the Coach brand since it's not considered as high-end.

Cash generated by Coach and the sale of Stuart Weitzman will support management's share-repurchase program. It announced an accelerated share repurchase of $2 billion in November after regulators struck down its proposed acquisition of Capri (which would've added brands like Michael Kors and Versace). Strong cash flows should support continued capital returns, which will show up in earnings per share. Management expects free cash flow of $1.3 billion this year, up from $1.1 billion last year.

Shares continued to climb higher since Q1 when Sharma added the stock to SRS' portfolio. The stock now trades at a forward P/E of 18. While that's well below Nvidia's 38-times earnings multiple, it's the highest valuation it's traded for in years. As such, it might be worth waiting for a pullback in price before following the billionaire into the luxury handbag stock.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.