Stanley Druckenmiller is a legendary investor with a long and successful career on Wall Street. He began his career as an economist, but soon left academia to gain hands-on experience in the investment world. He worked for George Soros and ran his fund, Duquesne Capital, before retiring in 2010. In today’s FA Alpha Daily, we’ll examine Druckenmiller’s portfolio and provide a deeper look at his current holdings to see how it stands in the current financial world.
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Stanley Druckenmiller’s investing career has been composed of lots of ups and downs.
But what made him a Wall Street legend is his ability to tackle almost every single problem he has encountered over this 30-year-long investing career.
He started to get interested in financial markets during his studies but wanted to get real industry experience. With that important decision, he dropped out of his Ph.D. in Economics and started to work as a securities analyst.
Later on, George Soros discovered his talent and trusted him to run his biggest fund. While working together, the duo has made one of the most famous trades in history. They “broke the Bank of England” by shorting the British pound sterling, making more than $1 billion in profits.
This trade has put Druckenmiller’s name on the world stage.
However, his success and fame have slightly faded away after taking on significant losses during the dot-com bubble.
These losses made him resign from Soros Fund Management by the end of that year. This might have been a step down for him but it was also an opportunity to focus solely on his own fund, Duquesne Capital.
After realigning his focus, Druckenmiller has come back with an incredible investing performance.
By making a 30% annualized return between 2000-2010, he proved again his ability to overcome challenging situations.
This ability is actually what defines Druckenmiller as a legendary investor. Over his 30-year-long career, he developed a reputation for his ability to adapt quickly to changing and challenging market conditions.
As he gained more experience and learned from his mistakes, he became more flexible in his investment decisions, being willing to adjust his positions and portfolios as new information appear.
In 2010, he made another important decision for his career and announced his retirement. One of the main reasons for his retirement was that he couldn’t get the flexibility and adaptability he wanted while managing huge sums of money, and these were the traits that made him a legend.
After announcing his retirement, the fund was recording a loss of around 5% but Druckenmiller did not want to let his investors down. He shortly took new positions to capitalize on Fed’s Quantitative Easing program and closed the fund with a small gain for his investors.
Since closing the fund, he has concentrated on managing his own money and opened up the Duquesne Family Office to continue what he loves to do.
Let’s take a closer look at the top holdings of his most recent portfolio and evaluate if he is well-positioned for another challenging market environment.
Economic productivity is massively misunderstood on Wall Street. This is reflected by the 130+ distortions in the Generally Accepted Accounting Principles (GAAP) that make as-reported results poor representations of real economic productivity.
These distortions include the poor capitalization of R&D, the use of goodwill and intangibles to inflate a company’s asset base, a poor understanding of one-off expense line items, as well as flawed acquisition accounting.
It’s no surprise that once many of these distortions are accounted for, it becomes apparent which companies are in real robust profitability and which may not be as strong of an investment.
See for yourself below.
Looking at as-reported accounting numbers, investors would think that the Wall Street legend Druckenmiller invests in below-average companies.
On an as-reported basis, many of the companies in the fund are poor performers. The average as-reported ROA for the top 15 holdings of the fund is 7%, which is below the U.S. corporate average.
However, once we make Uniform Accounting adjustments to accurately calculate the earning power, we can see that the average return in Duquesne Family Office’s top 15 holdings is actually 21%.
As the distortions from as-reported accounting are removed, we can see that IQVIA Holdings (IQV) isn’t a 5% return business. In fact, the company boosts a Uniform ROA of 123%.
Meanwhile, Microsoft (MSFT) seems like a 15% return business, but this massive technology corporation actually powers a 39% Uniform ROA.
That being said, to find companies that can deliver alpha beyond the market, just finding companies where as-reported metrics misrepresent a company’s real profitability is insufficient.
To really generate alpha, any investor also needs to identify where the market is significantly undervaluing the company’s potential.
These dislocations demonstrate that most of these firms are in a different financial position than GAAP may make their books appear. But there is another crucial step in the search for alpha. Investors need to also find companies that are performing better than their valuations imply.
Valens has built a systematic process called Embedded Expectations Analysis to help investors get a sense of the future performance already baked into a company’s current stock price. Take a look:
This chart shows four interesting data points:
- The average Uniform ROA among Duquesne Family Office’s top 15 holdings is actually 21% which is better than the corporate average in the United States.
- The analyst-expected Uniform ROA represents what ROA is forecasted to do over the next two years. To get the ROA value, we take consensus Wall Street estimates and convert them to the Uniform Accounting framework.
- The market-implied Uniform ROA is what the market thinks Uniform ROA is going to be in the three years following the analyst expectations, which for most companies here are 2023, 2024, and 2025. Here, we show the sort of economic productivity a company needs to achieve to justify its current stock price.
- The Uniform P/E is our measure of how expensive a company is relative to its Uniform earnings. For reference, the average Uniform P/E across the investing universe is roughly 20x.
Embedded Expectations Analysis of Duquesne Family Office paints a clear picture. Over the next few years, Wall Street analysts expect the companies in the fund to improve their profitability. The market agrees with analysts but has a more optimistic view of the companies in the portfolio.
Analysts forecast the portfolio holdings on average to see Uniform ROA increase to 26% over the next two years. At current valuations, the market’s expectations are in line with analysts and it expects a 33% Uniform ROA for the companies in the portfolio.
For instance, Nvidia (NVDA) returned 26% this year. Analysts think its returns will rise to 42% over the next two years. At a 55.2x Uniform P/E, the market also expects an improvement in profitability and is pricing Uniform ROA to be around 68%.
Similarly, Lamb Weston Holding’s (LW) Uniform ROA is 9%. Analysts expect its returns will increase to 16%. And the market thinks the company’s profitability will increase further to 23% Uniform ROA.
Looking at Druckenmiller’s top holdings, we can see that his portfolio is composed of high-quality companies across various sectors and is well-diversified.
The only concerning factor might be the Uniform P/E ratio, which is about 30 times. That’s higher than the market average of 20 times. Both analysts and the market expects profitability improvement for these companies.
With a turbulent market environment as recessionary concerns rise, this might create some problems for Druckenmiller and limit his upside.
However, using his experience and ability to adapt to challenging market conditions, he might overcome these problems as he did numerous times before.
But investors should be highly attentive while investing in companies with high expectations these days. They should also be careful about current valuations before jumping on an investment opportunity.
This just goes to show the importance of valuation in the investing process. Finding a company with strong profitability and growth is only half of the process. The other, just as important part, is attaching reasonable valuations to the companies and understanding which have upside which has not been fully priced into their current prices.
To see a list of companies that have great performance and stability also at attractive valuations, the Valens Conviction Long Idea List is the place to look. The conviction list is powered by the Valens database, which offers access to full Uniform Accounting metrics for thousands of companies.
Click here to get access.
Read on to see a detailed tearsheet of one of the Duquesne Family Office’s largest holdings.
SUMMARY and Coupang, Inc. Tearsheet
As one of Duquesne Family Office’s largest individual stock holdings, we’re highlighting Coupang, Inc. (CPNG:USA) tearsheet today.
As the Uniform Accounting tearsheet for Coupang, Inc. highlights, its Uniform P/E trades at 39.8x, which is above the global corporate average of 18.4x, but below its historical average of 108.5x.
High P/Es require high EPS growth to sustain them. In the case of Coupang, Inc., the company has recently shown 110% Uniform EPS shrinkage.
Wall Street analysts provide stock and valuation recommendations that, in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Coupang, Inc.’s Wall Street analyst-driven forecast is for EPS to grow by 433% and 61% in 2023 and 2024, respectively.
Furthermore, the company’s return on assets was 5% in 2022, which is below the long-run corporate averages. Also, cash flows and cash on hand consistently exceed its total obligations—including debt maturities and CAPEX maintenance. These signal low operating risks.
Lastly, Coupang, Inc.’s Uniform earnings growth is above peer averages, and above peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.