Stanley Druckenmiller is a legendary investor. He founded Duquesne Capital in 1981 and for some time balanced his management of the fund with being a portfolio manager for George Soros. Druckenmiller shut down Duquesne Capital in 2010, but he continues to manage money as a family office. We have gone through his 13F filings for the second quarter of 2012 and compared it to the filing for the previous quarter, and here are some macro themes that we have noticed in Druckenmiller’s recent activity:
Housing. There has been some speculation that the housing market in the U.S. has bottomed, and Druckenmiller appears to be buying into that hard. He added 3.3 million shares of Lennar (NYSE:LEN) and 4.7 million shares of D.R. Horton (NYSE: DHI), two large homebuilders which each carry a market cap of about $6 billion. So far this year both stocks are up over 40% and have been increasing steadily even as the broader market has tried to regain its highs from the spring. The forward P/E ratios for these stocks are now 22 for Lennar and 20 for D.R. Horton. For Druckenmiller to get into these stock in the second quarter indicates that he felt not only that the housing market was turning around but also implies that he is now bullish on the U.S. in macro terms. The data here might be mixed, but investors who are long housing should take comfort in the fact that such a successful name agrees with them.
Cutting back on restaurants. Two of Druckenmiller’s top five positions from the first quarter’s 13F- McDonalds and Starbucks- were slashed to zero. The fund’s top position, Yum Brands, was cut by about 40%. Out of the four restaurant stocks that were present in the top five slots in Druckenmiller’s portfolio- a heavy commitment to one industry- the only one which was added to over the course of the second quarter was growth monster Chipotle (NYSE:CMG). This one may have been a miss: Chipotle is down over 20% since the end of June as the market revises its growth expectations from “very high” to “high.” Yum Brands, McDonalds, and Chipotle all made our list of the ten most popular restaurant stocks among hedge funds for the first quarter, but we think that it might be a good idea for current investors to follow Druckenmiller in backing out of the industry.
Healthcare. This one was mostly unchanged from the previous quarter, but with the initiation of a 1.2 million share position in Eli Lilly (NYSE:LLY) Druckenmiller now has four of his top ten positions in the healthcare sector. Normally healthcare is treated as a more defensive play, but with the addition of the homebuilders that clearly can’t be what Duquesne is thinking here. Eli Lilly and fellow holding Elan are drug manufacturers specializing in neuroscience, so our guess is that the group is making a growth investment in those two and value-based investments in giants Merck and Pfizer, each of which trades at less than 12 times forward earnings and pays a dividend yield of at least 3.7%.
Cigarettes. Altria Group (NYSE:MO) is another traditionally defensive company, with a beta of 0.4, but in this case we think it’s pretty easy to see why Druckenmiller likes the stock to the tune of 3.4 million shares and the top spot in its portfolio: it is a value and income machine. Altria trades at 16 times trailing earnings and has posted good growth in revenue and earnings in recent quarters, and at current prices the dividend yield is 4.7%. With a market capitalization of $72 billion and a strong position in the cigarette market, the company is a stable long-term investment.
There was a sharp shift in Duquesne’s portfolio as it sold out of restaurants and moved into homebuilders, two industry plays that investors would be wise to note. Druckenmiller also bolstered his investment in neuroscience drugs and kept his growth investments balanced with steady positions in Merck, Pfizer, and Altria Group.