Market Doomsdayer Stan Druckenmiller Buys Gold, Ag, Defense, Halliburton

The former partner of George Soros (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio), had few positive things to say about the economy and markets at the 2016 Ira Sohn conference in May.

In his forebodingly named presentation, “The Endgame,” the founder of the legendary Duquesne Capital listed a number of reasons for his concern. Druckenmiller pointed primarily to unproductive investment of debt by corporations, a lax Fed, a sputtering Chinese economy and higher valuations.

Druckenmiller, who closed Duquesne Capital to start Duquesne Family Office six years ago and has famous annualized returns of 30%, directed much of his criticism toward the Fed. In employing short-term fixes to prop up the market he said, it had foreclosed on market signals that would demand entitlement and tax reform, increasing market risk. By contrast, Volker policies of the early ‘80s were “willing to sacrifice near-term pain to ride the economy of inflation and drive reform,” ushering in a lasting economic boom.

Corporations weren’t spared. Druckenmiller said he saw cash flow growth peak five years ago and now turn negative year over year as debt swells – an event unprecedented since right after World War II.

In Druckenmiller’s mind, corporations had also failed to put the debt to good use. Unlike their focus on capital expenditures in the ‘90s, they had spent most on buybacks and M&A this time.

“While policymakers have no end game,” Druckenmiller concluded, “markets do.”

Druckenmiller’s recommendation in such an environment? Sell everything. But instead of heeding his own advice in the second quarter, he sold 21 of his portfolio's 31 positions, and bought 20 new ones.

Druckenmiller sold or greatly reduced many of his normal-life stocks: software, utilities, online media, beverages. Instead, he bought things that might look at home in a world of survivalists: mining, food, banks, defense, steel and medical.

The investor also disclosed at Ira Sohn that Duquesne has a large position in the traditional safety hedge in which Warren Buffett (Trades, Portfolio) has said he sees little value: gold. Druckenmiller said he regards it as a currency rather than a metal, and it remained his “largest currency allocation.”

His bullishness on gold manifest in his second-quarter buying. Druckenmiller started a $38.7 million position in diversified gold and metals miner Freeport-McMoRan Inc. (FCX, Financial), worth 4.4% of his portfolio, and retained his 4.5% holding of Barrick Gold Corp. (ABX, Financial) and 2.7% holding in Agnico Eagle Mines Ltd. (AEM, Financial). Both stocks were trading near five-year low by the end of 2015; Druckenmiller caught them in the first quarter on their triple-digit year-to-date upswing.

Further within the basic materials sector – his biggest at a quarter of the portfolio – Druckenmiller took positions of slightly more than 2% each in three agriculture stocks: CF Industries Holdings Inc. (CF, Financial), Agrium Inc. (AGU, Financial) and Potash Corp. of Saskatchewan Inc. (POT, Financial). He added a company to farm the food, Deere & Co. (DE, Financial).

In aerospace and defense, Druckenmiller took smaller positions in General Dynamics (GD, Financial) and Raytheon (RTN, Financial), and indirect exposure through Alcoa Inc. (AA, Financial), which provides metals to the defense industry.

But the splashiest among Druckenmiller’s new picks was a $98.6 million stake in oil services company Halliburton Co. (HAL, Financial), making it new second-largest position at 11.3% of his portfolio. Only Facebook (FB, Financial), a stake he reduced by 54%, exceeds it in size.

Halliburton’s shares followed oil’s tumble in the year and a half leading to 2016, falling 53%. In its second-quarter earnings results, however, Halliburton executives pointed to evidence of a market bottom and fledgling turnaround. Rig counts increased by 26 during the quarter, ending their 78% plunge since peaking in November 2014, a sign of operator confidence in commodity prices. Halliburton said it expected rig counts to continue growing through the second half of the year and planned to leverage its increased market share to capture more business in a recovery.

Druckenmiller may have bought Halliburton in anticipation of the closing of its planned acquisition of the third-largest oil services company, Baker Hughes (BHI, Financial). The deal, announced on Nov. 17, 2014, met much resistance by regulators. On May 2 this year, the companies terminated the merger due to the regulatory challenges and industry conditions. Their announcement had marginal effect on Halliburton's stock price, which has since climbed 8.25% to $44.94 -- a 32% increase year to date.

Because Druckenmiller owns only 0.25% of the company’s shares, well below the 5% threshold the SEC requires for investors to disclose share adjustments before quarter-end, whether he reduced the position since then or held onto it for other reasons is unknown.

GAMCO Investors’ Mario Gabelli (Trades, Portfolio), who holds Halliburton, mentioned the merger failure in a recent letter and said he banked on an oil recovery to lift its shares and valued it at $55 per share.

“With its merger with Baker Hughes blocked by the Department of Justice in May 2016, HAL is now refocusing its attention on cost savings and preparing for the eventual upturn in global exploration and production (E&P) capital budget spending,” he said.

“The company has targeted to reduce $1B in costs globally by the end of 2016. As the market leader in pressure pumping as well as completion equipment and services, HAL is well positioned to benefit from the recovery from higher oil prices and a pickup in drilling activity.”

Halliburton is also well-documented to profit from conflict. According to a 2013 analysis by the Financial Times, KBR, a former subsidiary of Halliburton, saw the most benefit of all contractors during the Iraq war. The publication estimated that the company, run during the time by then-vice president to George W. Bush, Dick Cheney, garnered $39.5 billion in federal contracts.

Druckenmiller expressed bullishness on oil back in April 2015, suggesting prices would rise in 2016 due to companies limiting exploration and production, according to Bloomberg. He did not make predictions for the commodity in his more recent Ira Sohn presentation.

If he remains bullish, he has not positioned himself to benefit as yet. His portfolio contains only one other oil-related stock, Williams Companies (WMB), weighted at less than a percent. He also reduced his exposure to the sector in the past three quarters.

Halliburton realized a 9% year-over-year decline in revenue for the second quarter, reporting $3.84 billion. It had a net loss of $3.2 billion, compared to net income of $54 million in the second quarter last year. Its net loss per share was $3.73, reflecting a $3.5 billion charge for terminating the agreement with Baker Hughes and the mandatory redemption of $2.5 billion in senior notes.

Previously, Halliburton had beaten consensus earnings estimates for the seven consecutive quarters leading up to the first quarter, according to Reuters.

GuruFocus shows the company increased revenue at a rate of 8.4% over the past five years, and free cash flow at 39.8%. Its book value also grew by 9.3% on annual average. Gross margins have declined at a rate of 9.2%.

Halliburton closed the second quarter with long-term debt totaling $12.2 billion. According to its quarterly filing, it has a combination of $3.1 billion of cash and $3.0 billion in available credit to capitalize on better oil prices, if they come.

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