It’s been a tough few years for John Paulson’s Paulson & Co. After remarkable success shorting the housing bubble and, later, going long gold, his fund has struggled and is well down from its high water mark. Paulson is still a billionaire, however, and frequently followed by market watchers. His fund filed its 13F with the SEC in mid November, and we have compared it with previous filings to identify stocks that Paulson initiated a position in during the third quarter of 2012. Read on for our quick take on Paulson’s five largest new stock positions or see the full list of stocks in his 13F portfolio.
Spanish pharmaceutical company Grifols SA, Barcelona (NASDAQ:GRFS) was Paulson’s largest new holding according to the 13F, with the fund reporting a position of more than 16 million shares. Grifols has more than doubled in price in the last year, and its earnings have been up substantially. Investors believe that there is more growth ahead and so they have bid the stock up to a valuation of 60 times the company’s trailing earnings. We’re not familiar with the company’s products, and we’d note that the earnings multiple is quite high, so it would be a low-priority research target for us.
Paulson also initiated a position in MetroPCS Communications Inc (NYSE:PCS), the $3.8 billion market cap wireless phone company. MetroPCS, like Grifols, reported a large increase in net income in its most recent quarter compared to the same period in the previous year, though revenue was up only slightly. Sell-side analysts expect a bit of a correction in the company’s business next year, with the forward P/E multiple of 13 being above where the stock trades on a trailing basis, but their estimates look more rosy over the long term. This places it a bit cheaper than competitors like Verizon, though it’s certainly a much smaller company. James Dinan’s York Capital Management also added MetroPCS to its portfolio during the third quarter (find more stock picks from York Capital Management).
Potential takeover target Nexen Inc. (NYSE:NXY) was another new stock pick. The Canadian government continues to review Chinese oil company CNOOC’s bid for Nexen, which is notable for its presence in the Alberta tar sands. The deal is controversial in Canada, and as a result it’s not certain that it will be approved. A number of hedge funds got into the stock during the third quarter; merger arbitrage is a common hedge fund strategy as the returns from investing in merger targets tend to be uncorrelated with the broader market (read more about why hedge funds invest in merger arbitrage strategies).
The fund bought 1.4 million shares of Shire PLC (NASDAQ:SHPG) between the beginning of July and the end of September. Shire is a $16 billion market cap pharmaceutical company headquartered in Ireland. It’s a bit more mature in its development cycle than Grifols and so its earnings multiples are in the teens, indicating that it might be more of a value play as long as it can continue to grow its earnings (in the third quarter, net income was 18% higher than in the same period in 2011). Given the stock’s pricing, we’re a bit more interested here and might look at the company in more depth and compare it to larger pharmaceutical companies.
Paulson liked AMERIGROUP Corporation (NYSE:AGP), initiating a position of 1 million shares. Amerigroup serves recipients of government programs such as Medicaid and CHIP. Possibly because these operations are seen as less risky, it carries considerably higher multiples than tends to be the case among health insurers and health care providers. For example, it trades at 19 times forward earnings estimates while leading health insurer UnitedHealth has a forward P/E of 9 and hospital HCA is valued at 8 times consensus earnings for 2013. As a result we’d probably be more interested in considering an investment in those companies, rather than take on the heavy premium attached to Amerigroup.