In August, billionaire Stanley Druckenmiller’s family office (Druckenmiller is the former head of Duquesne Capital) filed its 13F for the second quarter of 2013 with the SEC. We’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). As a result we track 13Fs, not only to help us create our own portfolio based on this strategy (which outperformed the S&P 500 by 33 percentage points in the last 11 months) but also to see generally how top managers are playing the market and if they have any interesting investment ideas. Here are some things we noticed when comparing Druckenmiller’s filing for the end of June with previous filings (see a history of Druckenmiller’s stock picks).
Selling homebuilders. Two of the billionaire’s three largest holdings at the beginning of April had been homebuilders: Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI); these two names are now out of the portfolio entirely. After a great 2012 for the industry, however, each of these stocks is actually down year to date as investor expectations for the housing market have fallen a bit. Lennar and D.R. Horton feature trailing earnings multiples in the 15-18 range, so they are still dependent on decent growth over the next few years before the business cycle likely turns against housing once again. Each of these two companies reported a more than doubling of pretax income in the second quarter of 2013 versus a year earlier (reported earnings numbers are down because of tax benefits in the prior year period). We would be wary of being too optimistic about any company tied to housing, and would note that at least 15% of the float is held short in each case, but if conditions continue to improve than these valuations might actually look interesting.
Google. Druckenmiller roughly doubled his holdings of Google Inc (NASDAQ:GOOG) making it by far his largest 13F position by market value. In the second quarter of 2013, Google’s revenue grew by 20% versus a year earlier and with net margins contracting only slightly the company’s net income was up 16%. Gains from the Motorola Mobility Holdings integration process will likely fade, though market share in tablets and smartphones remains strong and of course the search business is still a star asset. Google Inc (NASDAQ:GOOG), which had been one of the most popular stocks among hedge funds in Q1, trades at 17 times forward earnings estimates.
CBS. Another big buy in Druckenmiller’s portfolio was his stake of about 2 million shares in CBS Corporation (NYSE:CBS). This is something of a special situation, as the company spins out its outdoor advertising business as a real estate investment trust; REITs normally receive favorable tax treatment, so this move would create shareholder value. Between this factor and the continued popularity of CBS’s television programming, the stock is valued at 20 times trailing earnings, a premium to many other media and entertainment companies. Greenlight Capital, managed by billionaire David Einhorn, has been another significant shareholder in CBS (find Einhorn’s favorite stocks).
Selling Pfizer. According to the filing, Druckenmiller dumped all his 3.4 million shares of Pfizer Inc. (NYSE:PFE) last quarter. Pfizer has been selling or spinning out a number of its assets over the past couple years, and in theory this may help management focus more on the core business. Analyst expectations for next year imply a forward P/E of 13. The stock pays a dividend yield of 3.3% at current prices and dividend levels, though this is not particularly high for a large pharmaceutical company.
A good deal of future growth is already priced in at Google Inc (NASDAQ:GOOG)- and a good deal of shareholder value creation is already priced in at CBS Corporation (NYSE:CBS)- but in each case the business is doing well, and the earnings multiples are hardly ridiculous given that fact. As a result while neither is a pure value stock, they could each be worth further research. Homebuilding actually seems to have some prospects as well: Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI) and their peers would need to continue to increase profits, but the degree to which these stocks have lagged the market year to date as results have come in has set the bar a little less high for the housing market in our view. Of course we would still be wary given the high short interest.
Disclosure: I own no shares of any stocks mentioned in this article.