The Investor Who Challenged Warren Buffett And Got It Right

Being one of the most acclaimed investors of all-time means it rarely happens that someone has the courage to challenge your views on one stock or another. Considering Warren Buffett‘s track record, it is no wonder that most of the investment community tends to treat his stock picking acumen as gospel. However, there is one man who had no problem taking on the Oracle of Omaha, challenging his stance on International Business Machines Corp. (NYSE:IBM) back in 2013. Stanley Druckenmiller, the founder of Duquesne Capital, did not become one of the greatest hedge fund managers simply by going with the crowd or following trends. He has made his share of bold moves over the years, the most famous being his very own Big Short, when he broke the Bank of England in 1992. Druckenmiller heavily shorted the British Pound at that time and booked a fabulous $1 billion in profits for George Soros‘ Quantum Fund. Druckenmiller has said that he doesn’t like the idea of diversification and stated his belief that “its better to put all eggs in one basket, if you really like the basket”. Druckenmiller is against focusing on risk adjusted returns and diversification, and believes that taking on risk is the only way to generate high, constant returns.

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Back in November 2013, Mr. Druckenmiller questioned the logic behind Warren Buffett’s decision to hold on to his investment in International Business Machines Corp. (NYSE:IBM), the iconic technology giant. In an interview with Bloomberg’s Stephanie Ruhle, Druckenmiller shared his views on technology stocks and the economy, criticizing the direction IBM was heading in at that time. When asked about his opinion on the stock, he said it was “one of the more higher probabilities shorts I’ve seen in years.” The reason behind this assertion was that, in Druckenmiller’s opinion, IBM had failed to keep up with the progress in the technology sector. He went on to say that its old technology would inevitably be replaced by cloud services, a process that was already underway. Druckenmiller went on to criticize the management of IBM and the direction it had been steering the company. Rather than focus on research and development, its management was preoccupied with cutting costs and buying back its own stock to make its earnings look good. Druckenmiller also lamented IBM’s acquisitions, pointing to the fact that the company’s sales had been decreasing since 2009 despite the tech giant having completed 47 acquisitions between then and the time of the interview. Last but not least, the “truth-teller” in a company was also showing signs of trouble: IBM’s free cash flow had been consistently decreasing over the years.

Head to the next page to see how Mr. Druckenmiller’s bearish theory did against Mr. Buffett’s bullish one.

So, after a little more than two years, let’s find who was right. At the time the aforementioned interview took place, International Business Machines Corp. (NYSE:IBM) was trading at $181.30 per share and was already in an obvious downtrend. The stock ended 2014 down by 13% and 2015 down by roughly 15%; not the performance you’d expect from an iconic stalwart. The stock has sank even lower in early 2016, reaching a low of $116.90 per share, a decline of 35.5% from the time of the interview. Since hitting that low point, the stock has rebounded somewhat, ending yesterday’s trading session at $134.37 per share, which means the stock is currently down by 26% since Druckenmiller issued his verdict.

Let’s also take a look at the fundamentals Druckenmiller was talking about. According to data from Morningstar, IBM’s revenue for 2013 amounted to $99.7 billion, which fell all the way to $81.7 billion in 2015, a decline of 18% over two years. Whereas the company’s free cash flow stood at $13.3 billion at the end of 2013, by the end of 2015 that figure had fallen to $12.8 billion. Again, Druckenmiller was spot on. So, is there light at the end of the tunnel? IBM’s latest quarterly report seems to point to a change of fortune. For the fourth quarter, the company reported earnings of $4.84 per share on the back of $22.06 billion in revenue, while analysts had predicted revenue of $22.02 billion and earnings of $4.81 a share. Most importantly, IBM registered a 43% increase in its revenue from its cloud business, to $10.2 billion in 2015, although the growth rate could have been even greater, reaching 57% if not for currency headwinds and divestitures. Ginni Rometty, IBM’s CEO, said the company’s main goal continues to be a shift from the weakening software business into the growing cloud business.

To this day, Warren Buffett has held to his guns and has steadily increased his investment in IBM. According to Berkshire Hathaway’s latest 13F filing, Buffett’s holding amounts to 81 million shares, up from the 68 million shares reported at the end of the third quarter of 2013.

Head to the final page to see how Mr. Druckenmiller’s bullish bets from that interview ended up turning out.

If Stanley Druckenmiller was a bear regarding IBM, what technology stocks did he like? In the same interview with Stephanie Ruhle, Druckenmiller reiterated his admiration for Alphabet Inc (NASDAQ:GOOGL) and stated his belief that it was the most innovative company around. He was also bullish on Amazon.com, Inc. (NASDAQ:AMZN), but was baffled by the market’s failure to take into account the potential of its cloud computing service Amazon Web Services (AWS), as investors continued to focus on the company’s retail business. Mr. Druckenmiller was adamant that Amazon had a real gem on its hands, that could amount to as much as 50% of the company’s revenue within the following five years. Since then, Amazon.com, Inc. (NASDAQ:AMZN) has surged by more than 55%, while Alphabet Inc (NASDAQ:GOOGL) has advanced by approximately 44%.

According to Duquesne Capital’s latest 13F filing, Druckenmiller is still betting on both of these companies. His family office currently holds 190,000 shares of Amazon.com, Inc. (NASDAQ:AMZN) valued at $128 million and 32,800 class A Shares of Alphabet Inc (NASDAQ:GOOGL) worth $25.5 million.

Stanley Druckenmiller also addressed his bullish views on Herbalife Ltd. (NYSE:HLF) during the interview, a company that has been surrounded by controversy since Pershing Square’s Bill Ackman vowed to prove the company is nothing more than a ponzi scheme and made it his mission to bring it down. In the end, Ackman was unsuccessful, as investigations conducted by the FBI and the U.S. attorney’s office have recently cleared the company of all allegations. Druckenmiller confessed to having initiated his stake in Herbalife Ltd. (NYSE:HLF) simply because William Stiritz, whom he sees as a hero of the investment world, had bet the ranch on it. According to his most recent filing with the SEC, Stiritz currently holds 4.78 million shares of Herbalife Ltd. (NYSE:HLF), a position worth $268 million. At the time of the interview, Druckenmiller’s Duquesne Capital held 79,032 shares of Herbalife, a position that was closed shortly after. Although the stock lost roughly 22% of its value since then, it is difficult to say how much of the decline was caused by bad publicity and constant attacks from Bill Ackman and his supporters, so the jury is still out on this one.

Disclosure: None