Anglogold, Novagold, Randgold: Why Billionaire John Paulson Loves Gold

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PAULSON & COBillionaire John Paulson founded Paulson & Co. in 1994 and has become famous for his bets against subprime mortgages. Paulson’s strategy focuses on macro-themed investments rather than picking individual stocks. Paulson’s big themes in the past have been betting against banks during the financial crisis, and then betting on them during their recovery. Paulson’s most recent bet has been on gold, where in 2010 he made upwards of $5 billion by investing in the commodity. Given the economic uncertainty and loose monetary policy in the U.S., Paulson’s overwhelming theme continues to be long gold. Paulson’s top 3Q position – making up almost 30% of his 13F – is still the SPDR Gold Trust (see all of John Paulson’s newest picks).

The gold industry has been in a bull market for close to ten years as rates have been in a steady slide. As interest rates are now at rock bottom lows, and expected to remain that way through 2015 per the Fed, the question becomes: how much higher can gold prices go? In the current low-rate environment, we place gold as a safe-haven investment as investors look for stability and inflation protection. We believe that Paulson’s top five gold picks will see strong sales and growth as a result of increasing demand for gold. Also bolstering a continued upward trend for gold prices will be continued uncertainty in international markets, such as Europe, where the threat of defaults make gold an even more attractive safe haven.

Anglogold Ashanti Limited (NYSE:AU) is Paulson’s 2nd largest 13F holding and largest stock holding. At 11x earnings, Anglogold would appear to be a solid buy with its historical P/E being north of 13x. Billionaire investor - and founder of Renaissance Technologies - Jim Simons is one of the top fund owners of Anglogold (see Jim Simons' top picks).

Novagold Resources Inc. (NYSEAMEX:NG) is Paulson’s second gold pick and 14th largest 13F holding. Billionaire Steven Cohen – founder of SAC Capital – is also a fan of Novagold and increased his 2Q stake over 175% (check out Steven Cohen’s newest picks).

Gold Fields Limited (NYSE:GFI) pays a 4.4% dividend yield – the highest dividend of Paulson’s top five gold stocks. Randgold Resources Ltd. (NASDAQ:GOLD) makes up Paulson’s fourth gold pick and is his 22nd largest 13F holding. Randgold recently saw production shortfalls and is down 15% over the last month.  Iamgold Corporation (NYSE:IAG) pays the second largest dividend yield – at 2.4% – of Paulson’s five gold stocks. Iamgold is seeing a slowing of its production, with 2013 guidance recently being revised downward - production is now expected to be down 13% from 2012.

Assuming investors would rather not have to invest in all five of Paulson’s gold picks, we decided to dig deep to uncover the best investment opportunity. Below is a summary of some key market data for Paulson’s gold stocks:

Ticker P/E Ratio P/S Ratio Dividend Yield Net Profit Margin Return on Equity Debt-to-Equity
AU 11x 1.8x 1.9% 24% 22% 0.6
NG - - - - 17% 0.6
GFI 9x 1.4x 4.4% 17% 14% 0.2
GOLD 22x 7.6x 0.4% 39% 19% 0.0
IAG 11x 2.4x 2.3% 26% 13% 0.0

From this data we see that Gold Fields is the cheapest in the industry, but for good reason, given its subpar profit margin and ROE. Worth noting is that Gold Fields does pay a very robust 4.4% dividend yield.

It sounds like a self-fulfilling prophecy that Paulson’s number one stock pick, Anglogold, is our pick for his best gold stock. In reality it was a close battle between Anglogold and Randgold. Randgold offers the best growth opportunities, but its out of line valuation should cause hesitation for investors. Randgold trades at a P/E and a P/S that is well above the other four gold stocks, but without offering investors an extraordinary ROE.

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