Why Did a Billionaire Go All in on Frozen Potatoes?

Why Did Stanley Druckenmiller Buy Lamb Weston? Frozen potatoes may not be the first thing that comes to mind when you think about a billionaire hedge fund manager’s portfolio. Nevertheless, noted investor Stanley Druckenmiller recently bought 947,000 shares of frozen potato processor Lamb Weston (NYSE:LW) at an average price of $78.21. This stock now accounts for over 4 percent of Druckenmiller’s portfolio, making it his seventh largest holding.

 

With a market full of potentially undervalued buys, it may seem strange that Druckenmiller decided to bet on something as mundane as a frozen potato manufacturer.There are, however, a number of compelling arguments behind this stock that make this decision somewhat more understandable.

 

Here’s what you should know about Lamb Weston and why Druckenmiller opened a position on the stock.

 

To understand why Druckenmiller included Lamb Weston in his portfolio, it’s first important to look at his somewhat unorthodox investment strategy.

 

Druckenmiller believes that the stock market is a leading indicator of macroeconomic conditions. Seeing signs of economic weakness in the future, it’s likely that he’s looking for solid, stable value stocks that can perform well in challenging market conditions.

 

Druckenmiller is also currently on the lookout for stocks to go long on. While normally comfortable with a mix of short and long positions, the famous investor is much more cautious on shorts in bear markets. Because a recovery can cause outsized losses, Druckenmiller would prefer to find long stocks on sale during a stock market rout.

 

It’s also worth noting that, to Druckenmiller, the Lamb Weston position isn’t actually a large one. Druckenmiller is an advocate of the controversial strategy of reducing investment risk through portfolio concentration.

 

As such, a stock that makes up 4 percent of his total portfolio is actually quite a modest holding. This fact suggests that Druckenmiller sees strong potential in Lamb Weston but is also hedging his bet by not acquiring more.

One of the simplest explanations for Druckenmiller’s position in Lamb Weston is the fact that the company is turning in excellent revenue and earnings numbers.

 

Lamb Weston’s revenues grew 14 percent year-over-year in the most recent quarter, rising to $1.126 billion. Earnings were even better, with diluted EPS rising 700 percent from the same quarter last year. The stock reported a stellar earnings beat of $0.75 per share against a consensus estimate of $0.52.

 

Druckenmiller may also have believed that Lamb Weston was undervalued relative to its growth prospects. At today’s prices, the stock’s price-to-earnings-growth ratio is 1.03.

 

Since share prices have risen more than 7 percent since Druckenmiller opened his position, this metric would have been under 1.0 at the time. A PEG of 1.0 or less is considered a classic signal that a stock is undervalued.

 

The value to growth argument for Lamb Weston is particularly compelling in light of long-term growth projections. Analysts expect the company to grow at an average rate of 33.9 percent. If the company achieves such a high rate of growth, Druckenmiller’s return over the next five years could be outstanding.

 

A final reason Stanley Druckenmiller may have gone long on Lamb Weston is the fact that the company could be a good hedge against inflation and economic downturns. Frozen potatoes are an inexpensive staple food, meaning that sales likely won’t be disrupted by macroeconomic conditions.

 

As noted above, Druckenmiller believes that the US economy could weaken in the near future. A staple food producer like Lamb Weston, therefore, could be a hedge against such a development.

 

Taking all of these factors into account, it’s relatively easy to see the appeal of Lamb Weston to Stanley Druckenmiller. This stock is a potentially good value that could continue to post strong growth numbers, even if the economy at large performs poorly. As such, it’s exactly the kind of conservative long position that Druckenmiller is looking for in today’s market.

 

As one of the world’s largest frozen potato processors, Lamb Weston enjoys an economic moat that makes it reasonably safe from competitors. Barring dramatic changes to consumer eating habits or the emergence of a competitor with markedly better efficiency, Lamb Weston is likely a fairly safe investment in today’s volatile market.

 

Analysts also believe that Lamb Weston still has room to run. LW’s median target price for the next 12 months is $95, 13.1 percent higher than the most recent price of $83.98. Counting the increase in share prices since his acquisition, this target would reflect a total return of 21.5 percent for Druckenmiller’s position.

 

Lamb Weston offers a modest dividend with room to grow, potentially making it attractive to long-term income investors. The stock currently yields 1.17 percent. Its payout ratio, though, is just over 35 percent, giving management a great deal of latitude to raise the dividend in the future.

 

It should be noted that the company’s dividend history is rather short. The first quarterly payment was only made in 2017.

 

With that said, Lamb Weston does carry one major risk in the form of debt. The company’s current debt-to-equity ratio is 5.29, raising concerns about the potential effect of debt obligations.

 

Rising interest rates could weigh on Lamb Weston if it cannot pay down these obligations in the near future. However, this factor clearly doesn’t concern Druckenmiller or many of his Wall Street competitors.

 

Institutional ownership of Lamb Weston tops 90 percent, strongly suggesting that investment firms have a high level of confidence in the company’s ability to manage its debts.

 

Debt risks notwithstanding, Lamb Weston is a relatively conservative growth opportunity. The stock appears to be priced quite fairly, especially given its long-term growth prospects. Investors seeking dividend appreciation could also see good results from Lamb Weston over time.

 

While the company probably won’t offer the meteoric returns sometimes found in the tech or biomedical sectors, Lamb Weston appears to be a stable, reliable company with decent potential in a wide range of portfolio types.

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