Exxon Mobil (XOM), Chevron (CVX) Among This Billionaire’s Top Picks

DUQUESNE CAPITALBillionaire Stanley Druckenmiller founded Duquesne Capital in 1981, but closed his fund in 2010. He continues to manage money and reports his holdings to the SEC quarterly via 13F filings. The recent third quarter 13F for Druckenmiller showed a number of additions to his top five holdings. We have identified Druckenmiller’s five largest 13F positions and will discuss them in more detail below. Here’s his full portfolio.

Two of Druckenmiller’s top five picks were new additions from the oil and gas industry. Exxon Mobil Corporation (NYSE:XOM) was Druckenmiller’s number one stock that made up 6.7% of his firm’s 3Q 13F. Chevron Corporation (NYSE:CVX), also a new pick for Druckenmiller in 3Q, takes the fourth spot in his 13F. Exxon and Chevron – two giants in the oil and gas industry – trade in line at 9x earnings and both pay solid dividends. The dividend yield on Exxon shares is 2.6%, while Chevron’s yield is 3.4%. As global GDP is expected to grow 2.3% in 2012 and 2.6% in 2013, it should boost demand for both oil and gas.

Exxon plans to target production growth of 1%-2% a year through 2016 with strong downstream operations – namely U.S. refining – and upstream growth opportunities, including increasing its focus on deepwater. Production for Chevron is expected to be 4%-5% from 2014 to 2017 on the back of downstream operations restructuring. Chevron expects to continue acquisitions with a focus on exploring and producing properties. Around 90% of 2012 CapEx is expected to be spent on E&P operations, spread geographically across Asia, the Americas and Africa.

The billionaire’s number two and number three 13F holdings are major homebuilders in the U.S. Lennar Corporation (NYSE:LEN) was the number two stock in Druckenmiller’s 13F portfolio at the end of 3Q, and D.R. Horton, Inc. (NYSE:DHI) the third largest.

D.R. is expected to see a 24% sales increase for fiscal year 2013, after posting a 24% sales increase from fiscal 2011 to 2012. The contract backlog for D.R. also shows solid prospects for an improving housing market, with 2012 contract backlog rising 70% from 2011. Lennar also has strong expected revenue growth in fiscal 2013, currently at 31% from 2012.

Low mortgage rates and an expected rise in employment will help drive the improving performance of Lennar and D.R., but we see both companies as having their own respective problems. D.R. appears to trade much cheaper on a P/E basis at 7x, compared to Lennar at 14x, but D.R.’s debt to equity ratio of 1.2 is over 50% that of Lennar. Given D.R.’s debt position we believe that Lennar is the best play in the homebuilding industry.

Merck & Co., Inc. (NYSE:MRK), the pharma giant, after a 43% share increase from 2Q, is now Druckenmiller’s fifth largest 13F holding. Merck is expected to see year-end sales decline due to the patent expiration on its respiratory drug Singulair. Although the drug company has a pipeline of other drugs, we see little value when comparing it to top competitor Pfizer. Merck and Pfizer trade in lockstep on a valuation basis and in terms of dividend yield, but Merck has a debt to equity ratio of 1.5, triple that of Pfizer. With Merck only expected to grow five-year earnings at 5% annually, we believe investors can find better values in pharma. Merck is also a Kahn Brothers’ Top Pick for 3Q.

Druckenmiller’s two big oil and gas bets should yield positive results in the long term given their industry-leading positions and strong global growth outlook. When playing the homebuilding industry, we prefer Lennar over D.R., and would suggest taking a look at other pharma companies before investing in Merck. Check out all of billionaire Stanley Druckenmiller’s 3Q stocks picks.

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