The Complete User\'s Guide to George Soros

The Complete User's Guide to George Soros

By James Altucher
Stockpickr.com
George Soros, next to Warren Buffett, is probably the greatest investor ever. His hedge fund, started in 1969, has returned on average over 26% per year. He's probably best known for "breaking the Bank of England" in 1992 when he bet massively against the English pound and ended up making $1 billion on what is now known in England as "Black Wednesday."

More recently, he's become much more active in both charity and politics. In particular, he spent millions of his personal money in a bid to unseat President Bush in the 2004 election. His investing dovetails with his politics and he's repeatedly pronounced that he's become a bear on the U.S. dollar. He’s very concerned about environmental issues, and judging from the stocks we discuss below, he’s probably a believer in peak oil theory, the idea that world oil production will peak then begin a continuous decline sooner rather than later.

At Stockpickr.com we keep track of all of Soros's holdings (see the link to the right), which he is required to file with the SEC once a quarter. Additionally, he personally owns several stocks outside of his hedge fund and we keep track of those as well. So to understand Soros it’s key to focus on several factors.

Soros thinks that the U.S. dollar will fall apart. This is best reflected in some of his oil and gas plays as he presumably thinks oil is going to continue to hit new highs. For instance, he owns two offshore drilling companies: Global Santa Fe (GSF) and Transocean (RIG).

Global Santa Fe is also owned by perhaps the greatest energy investor ever, T. Boone Pickens, who was up about 200% in 2005 and more than 20% in 2006. He is also believer in "peak oil" and bets accordingly. Pickens recently said that he thinks oil prices will quickly go to $75. He also recently called the near-term bottom in oil at $50. Based on Soros' portfolio, Soros probably feels the same way.

Global Santa Fe, in particular, seems cheap at a 14 P/E and a projected forward P/E of 6. This is based on the average analyst estimates which expect Global Santa Fe to make $9.12 a share in 2008, up from $7.12 a share in 2007, and $3.77 a share in 2006.

Similarly Transocean looks cheap as it’s expected to earn $11.07 per share in 2008, up from an expected $7.32 this year and $2.99 in 2006.

Soros is diversifying into other countries and continuing his diversification out of the dollar by loading up on commodity plays. For instance, his biggest holding is Companhia Vale Do Rio Doce (RIO), which, because he increased it more than 1,400% since the prior quarter's filing, now accounts for 9.6% of his portfolio.

The Brazilian company produces, exports and supplies iron ore and pellets to the steel-making industry. Additionally, it produces and sells many other metals, including nickel, gold, copper and aluminum.

Companhia Vale Do Rio Doce is the ultimate "BRIC" (Brazil, Russia, India, China) and commodities play. If you believe in a weaker dollar and a weaker U.S. in general, as Soros clearly does, then RIO is your bet. According to analysts covering the company, it has a forward price-to-earnings, or P/E, ratio of just 9. Analysts expect earnings per share to rise from $2.10 in 2005 to $3 in 2006 and to $4 in 2007.

Soros is also exploring plays that will benefit from exploration into alternative energy sources, as the world tries to dig its way out of its dependency on oil. With that in mind, his second largest holding is International Rectifier (IRF), which is a new position in his latest filing. Soros is a believer in global warming. IRF makes products ranging from power systems to power components and integrated circuits that are used in power management devices.

In January, International Rectifier’s second-quarter profits exceeded Wall Street’s estimate as the company earned 58 cents a share. Analysts expected 54 cents. The day after earnings, Nollenberger Capital Partners issued a Buy rating, stating "We believe IRF is the play on the trend for energy efficiency." Despite 200% year-over-year earnings growth, the company trades at a forward P/E of just 16.

Soros also has some new investments in technology, particularly in telecom chip makers. For instance, two new investments for him are TriQuint Semiconductor (TQNT) and Ciena (CIEN). TriQuint, still suffering from post-boom investor wariness, trades at a forward P/E ratio of just 12. In the past 12 months the company had almost 100% year-over-year earnings growth, and has net cash of $155 million in the bank. Soros is clearly not making the mistake he made in 2000 of buying tech high-flyers. Now he's waiting for tech to turn into value.

There's no clear thread through Soros's personal portfolio. His baby for years has been online clothing retailer Bluefly (BFLY) but this company still seems to be losing money despite the success of other online retailers. One stock in Soros's personal portfolio that bears looking at is Adams Respiratory Therapeutics (ARXT), which makes respiratory disorder drugs. Soros owns more than 9% of the company. Adams trades at just 13 times cash flows, has a solid balance sheet with $45 million cash in the bank and is expecting double digit revenue and earnings growth over the next year. This could be also a solid demographic play given that the baby boomers are turning 60 and will be need the company’s products before long.

I also like to pay attention to the hedge fund holdings of two Soros protégés that spun out of his fund in 2000: Duquesne Capital and Karsch Capital. Michael Karsch is a former tech analyst who worked for Soros and advised on various technology investments. Duquesne is run by Stanley Druckenmiller, who was featured in Jack Schwager's book, Stock Market Wizards. Druckenmiller was side by side with Soros when they made their famous bet against the English pound, and after many years with Soros eventually went on his own with Duquesne.

Soros is a deep macroeconomic thinker. His stock choices stem from his broader beliefs about the economy, demographics, and where he feels the world is heading. He takes big, focused bets and stands by them, making him an ideal investor to study and to potentially piggyback.

James Altucher, founder and CEO of Stockpickr.com, author of the book, "Trade Like Warren Buffett", and partner at Formula Capital