Billionaire Stanley Druckenmiller Is Quietly Loading Up on Healthcare Stocks -- Here's What His New Positions Reveal

Billionaire Stanley Druckenmiller, who runs the Duquesne Family Office hedge fund, has been loading up on healthcare stocks. A year ago, healthcare stocks represented almost 22% of the fund's portfolio. Today, that representation is up to more than 36%.

His fund's top holding is Natera (NASDAQ: NTRA), a cell-free DNA (cfDNA) testing company that represents about 17% of the fund's portfolio. In the second quarter, Duquesne bought an additional 122,700 shares of Natera.

The fund concentrates capital in high-conviction biotech and medtech bets while rotating in and out of cyclical stocks. Here's a glimpse into Duquesne's strategy.

Image source: Getty Images.

Druckenmiller likes noncyclical monopolies

Unlike standard sector exchange-traded funds (ETFs) that track broad pharmaceutical companies, Duquesne concentrates its capital allocation in biotech and diagnostic companies with proprietary technology. Natera has consistently been Duquesne's largest holding. The thesis for the stock relies on Natera's dominant market position in cell-free DNA testing, particularly for oncology and women's health, which benefits from secular tailwinds in early cancer detection and high regulatory barriers to entry.

The company's revenue is rising and the bottom line is getting closer to profitability. In the second quarter, it reported revenue of $752.8 million, up 38%, year over year. Gross margin rose by 110 basis points to 64.5% compared to the same quarter a year ago and by 50 basis points over the previous quarter. Natera is also seeing more testing volume, processing 1.044 billion tests, up 22%, year over year.

It reported an earnings per share (EPS) loss of $0.47, compared with a loss of $0.74 in the same quarter a year ago.

Based on its results, Natera says it expects yearly revenue of $2.85 billion to $2.91 billion, up 321% at the midpoint, and for the company to finish the year cash flow positive.

A focus on niche, catalyst-driven biotech companies

Duquesne often adds smaller, clinical-stage, or specialty biotechs operating in underserved markets with low competition. The fund's biggest buy in the second quarter was a 270,600-share purchase of Insmed (NASDAQ: INSM), a biotech company focused on pulmonary therapeutics and rare diseases. The company reported second-quarter revenue of $425.5 million, up 296%, year over year. It also narrowed its EPS loss to $0.06 from $1.70 in the same quarter a year ago.

Insmed has two commercial therapies: Brinsupri, a non-cystic fibrosis bronchiectasis treatment that saw revenue rise by 49% in the first quarter, and Arikayce, which reported an 8% year-over-year sales gain. It is an inhalation therapy to treat Mycobacterium avium complex lung disease.

The company also holds 203,600 shares in Rhythm Pharmaceuticals (NASDAQ: RYTM), a biotech targeting the genetic causes of rare obesity. The company provides upside exposure to the powerful anti-obesity theme without competing directly head-to-head against weight-loss giants Eli Lilly (NYSE: LLY) or Novo Nordisk (NYSE: NVO).

Rhythm's lead product is Imcivree, which in March received approval from the Food and Drug Administration for a new indication: treating acquired hypothalamic obesity, a rare condition caused by injury or dysfunction of the hypothalamus that leads to weight gain. It is also developing setmelanotide, which is in phase 3 clinical trials for treating acquired or congenital hypothalamic obesity, as well as treating pro-opiomelanocortin receptor deficiency obesity or leptin receptor deficiency obesity, plus SRC1 deficiency obesity and SH2B1 deficiency obesity.

Healthcare demand is somewhat protected

Healthcare offers structural demand insulated from standard economic growth cycles. When trim signals hit broader tech, industrial, or semiconductor plays, highly specialized biotech stocks act as an uncorrelated growth venue that doesn't rely on macro gross domestic product strength to drive gains.

Duquesne does not passively accumulate the entire sector; it actively trades healthcare cycles. For example, earlier filings showed trimming and exiting legacy pharmaceutical positions to concentrate capital in diagnostic and specialty biotech businesses, such as Natera and Insmed, while rotating tactical macro capital into financials or semiconductor recovery plays, depending on global economic conditions.

As of the company's latest 13F filing on Aug. 14, the fund reported a one-year return of more than 34%, compared to the S&P 500's (SNPINDEX: ^GSPC) return of slightly more than 20% during that same period. Actively managed funds such as Duquesne can entail greater risk alongside higher potential upside.

James Halley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly, Natera, Novo Nordisk, and Rhythm Pharmaceuticals. The Motley Fool has a disclosure policy.