What Should We Do With a Druckenmiller, Early in the Morningword 11/5/15

by Dan November 5, 2015 9:34 am • Commentary

At the Dealbook Conference on Tuesday,  Andrew Ross Sorkin (editor of the New York Time’s Dealbook blog and CNBC host) interviewed Stanley Druckenmiller, the founder of (now closed) hedge fund firm Duquesne Capital Management and  Soros alum. Watch here:

The most interesting commentary (about 11:30 in) is that he is very “open minded” to the notion that a bear market has begun in equities. He was bearish this summer, but then “covered very well”. He unfortunately “did not play the rally”, but merely “got out of the way of it”. He is now “neutral and long high beta, high growth stuff, companies that are investing in their businesses, stuff that will do very well with low nominal growth and short a bunch of value companies that buyback stock and need cyclical growth against it.” And here is the kicker, Druckenmiller said “I can see myself getting very bearish, and I can’t see myself getting really bullish”.

He makes a very important point, he is invested in companies that can do well with low nominal growth. Why? Because they are at the forefront of massive secular shifts in their businesses, and investors are not valuing them on earnings growth. Such has been the case with Amazon, which Druckenmiller stated he “loves”, and I suspect Facebook falls into the same camp.  Since 2005, AMZN has grown its sales from $8.5 billion to an expected $107 billion this year, the stock is up 1600% in that same time period, sporting a $300 billion market cap, 60% greater than Walmart’s. Since the start of 2005, AMZN has had cumulative revenues of $417 billion, less than WMT’s expected $496 billion this year, with a cumulative operating profit of a little less than $5 billion!  WMT is expected to book an operating profit of $24 billion on that $496 billion in sales in 2015, vs AMZN’s $2.3 billion on $107 billion in sales.  Something is not right here people.

Of course, Druckenmiller is right about AMZN stock, but for how long? Drukenmiller might have learned from his mistakes of stock market bubbles past, remembering how he lost a boat load for Soros back in 2000 as he piled into high valuation tech stocks in mid 1999, getting there just in time for the death rattle (here).

Billionaire’s have greater risk tolerance than you and me, and just because their investment view can defy logic doesn’t mean yours can.  Long high growth, high beta has worked in some stocks this year, especially considering the tight range of the SPX (12%), up only 2% on the year. But investors have been crowding into this increasingly small list of stocks. And it’s become a consensus view. So when the music stops, there’s going to be way more people than chairs. That’s why we’ve been detailing defined risk ways to stay (or even get into) these stocks. Like in Facebook yesterday: (Trade Ideas – Facebook ($FB:) Taking a Poke).

In ten years AMZN and WMT will both still be around. It’s likely that both will have much greater market values. But investors tripping over each other to buy AMZN up 106% on the year (and at all time highs) because billionaire investors “love it” while shunning WMT (down 32% on the year) need to be careful about why and how they’re doing it.