Stan Druckenmiller saw the potential for the next wave of artificial intelligence fairly early. That led him to take a big position in Nvidia in the fourth quarter of 2022. He added Microsoft in the first quarter of 2023, after it upped its stake in generative AI leader OpenAI. At the start of this year, he started taking gains on his Nvidia investment and put some into Apple.
But Druckenmiller has quickly changed his tune on the three biggest companies in the world. He sold shares of Nvidia, Apple, and Microsoft during the second quarter, according to his latest 13F filing with the SEC. Instead, he's focused on high-yield dividend stocks, which could all see their stock prices benefit from rate cuts by the Federal Reserve.
The Fed started this easing cycle on Sept. 18 with a 0.5-percentage-point cut to the federal funds rate. The market expects two 0.25-percentage-point cuts over the next three months and even further cuts in 2025. Here are the three stocks Druckenmiller is buying to take advantage.
1. Philip Morris
During the second quarter, Druckenmiller bought 889,355 shares of Philip Morris (NYSE: PM), in addition to call options giving him the right to buy an additional 963,000. Combined, the entire position was worth $187.7 million at the end of June.
Philip Morris is the world leader for an industry in decline. As the health risks of cigarettes are taught to new generations, fewer young consumers are buying cigarettes. But Philip Morris is committed to replacing cigarettes with smoke-free alternatives.
The tobacco company's smoke-free product portfolio includes popular heat sticks brand Iqos and Zyn nicotine pouches. It now estimates 36.5 million active customers of those smoke-free products. The Iqos brand is set to launch in the U.S. in the fourth quarter, which could provide another boost to its sales.
Even as Philip Morris focuses on the future of nicotine products, it's been able to maintain is cigarette sales through steady pricing power. Its market dominance, including brands like Marlboro and Parliament, give it strong pricing power, enabling it to offset declining unit sales.
The stock currently trades around 17.5 times forward earnings estimates and yields about 4.5%. That's a fair price to pay for a company that should be able to consistently grow earnings and its dividend as it manages the current transition within its industry.
2. Kinder Morgan
Druckenmiller added 2,872,665 shares of Kinder Morgan (NYSE: KMI) to his portfolio during the second quarter. That follows an initial purchase of 3,880,500 shares in the first quarter. The total value of the billionaire's position as of the end of the second quarter was $134.2 million.
Kinder Morgan is responsible for transporting approximately 40% of the natural gas consumed in the U.S. Its current growth driver, however, are liquefied natural gas (LNG) export facilities.
Management expects demand for natural gas to grow substantially between now and 2030. Liquefied natural gas exports could double during that period. On top of that, chairman Richard Kinder discussed the potential of AI to drive demand for energy during the company's second-quarter earnings call.
As companies build more AI data centers, they'll need to power them, and renewable energy isn't at the point where it can keep up with demand. Training and running advanced AI models requires a lot of energy, even as chipmakers work to make their designs more power efficient.
The stock currently trades at an enterprise value of 12.2 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) and yields about 5.3%. That valuation is near the high end of comparable companies, but it may be worth the price for a company in the dominant position of Kinder. Its steady free cash flow growth should support its dividend for years to come.
3. Mid-America Apartment Communities
Druckenmiller's last big buy from the second quarter was Mid-America Apartment Communities (NYSE: MAA). He established a position of 644,190 shares of the real estate investment trust (REIT), worth $91.9 million at the end of June.
MAA focused on residential multifamily properties. It currently owns 103,600 apartment units across the Sunbelt region. MAA focuses on markets with strong job growth, expanding populations, and high household formation rates. The result is strong demand for housing, which enables MAA to grow rental rates faster than the market.
As a REIT, it can benefit from falling interest rates. That means a lower cost of debt while making the yield on shares look even more attractive relative to bond investments. But MAA isn't waiting for rates to fall to invest in the future. It has $1 billion in its development pipeline.
The stock trades for about 17.4 times funds from operations (FFO) per share. That's roughly in line with other residential real estate investment trusts. But with its investments in the future, it could see strong growth in rents and FFO. And, with the shares currently yielding about 3.6%, it may be worth a closer look for investors interested in diversifying their portfolio with a REIT.
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Adam Levy has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Apple, Kinder Morgan, Microsoft, Mid-America Apartment Communities, and Nvidia. The Motley Fool recommends Philip Morris International and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Billionaire Stan Druckenmiller Is Selling Nvidia, Apple, and Microsoft, and Buying These High-Yield Dividend Stocks Instead was originally published by The Motley Fool