During the second quarter of 2013, billionaire John Paulson’s Paulson & Co. cut its holdings of the GLD ETF by about half as the fund accepted that gold (which is down about 20% year to date) might not rise as much on the Federal Reserve’s monetary policy as bulls had thought. By consulting Paulson’s 13F compared to his previous one (check out Paulson's favorite stocks over time), we can see if the fund has any interesting ideas which investors may want to take a closer look at. We track 13Fs as part of our work developing and implementing investment strategies- we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy), and our own portfolio following this strategy beat the market by 33 percentage points in the last 11 months. Here are some things we noticed in our analysis of Paulson’s most recent filing:
Family Dollar. Between April and June, Paulson increased his stake in Family Dollar Stores, Inc. (NYSE:FDO) by about 50%, to a total of 7.4 million shares. In its most recent quarter (which ended in early June), an increase in the retailer’s comp sales (and therefore revenue) was offset by higher costs resulting in a slight decrease in operating income and earnings. With a trailing P/E of 20 we would be concerned over any sign that Family Dollar Stores, Inc. (NYSE:FDO) might be having trouble growing its business, and given these results we might prefer to look at other dollar stores or discount retailers instead. Billionaire Nelson Peltz’s Trian Partners sold some of its stake in Family Dollar Stores, Inc. (NYSE:FDO) last quarter but still reported a significant position in the company (find Peltz's favorite stocks).
Selling Equinix. In addition to the gold ETF, Paulson and his team reduced their ownership of Equinix Inc (NASDAQ:EQIX), the $8.2 billion market cap data center services company, by about half to 1 million shares. Equinix Inc (NASDAQ:EQIX) is quite a speculative name: even with Wall Street analysts predicting an increase in earnings per share next year, the forward P/E is 41. Revenue was up 15% in the second quarter of 2013 versus a year earlier, but operating income actually grew at a slower rate than that. 25% of the float is held short as many market players are skeptical that growth rates will increase.
Holding on to acquirers. Much of the fund’s activity is based on merger arbitrage, but the 13F shows it maintaining much of its stake in the acquiring company post close. Paulson’s ownership of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) increased by about 7 million shares during Q2, fairly close to the number of shares the fund had received after the company purchased Plains Exploration and Production (which had been one of its top five stock picks). Many investors had been concerned that Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) would lose operational focus after adding Plains and another oil and gas company, but Paulson apparently disagrees. Currently Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is valued at 10 times forward earnings estimates, and while still down considerably year to date is up about 10% from its lows in late June. Billionaire Leon Cooperman’s Omega Advisors has also been bullish on the stock (see Cooperman's stock picks).
Interestingly, the fund also dumped many of its shares of Life Technologies Corp. (NASDAQ:LIFE) in exchange for a position of 5.7 million shares in Thermo Fisher Scientific Inc. (NYSE:TMO), which has agreed to acquire Life Technologies Corp. (NASDAQ:LIFE) in an all cash deal. The forward P/E at Thermo Fisher Scientific Inc. (NYSE:TMO), a $33 billion market cap technical equipment and instruments company, is 16 and in the second quarter of 2013 the company reported rising revenue and earnings. T MOBILE US INC (NYSE:TMUS) was another recent acquirer of a Paulson position (in MetroPCS) which was among the fund’s largest holdings at the beginning of July.
We’re not sure how much more upside there is in Freeport-McMoRan, and we are wary of the company’s integration risks (though we would note that insider buying activity has continued to be high in recent weeks). Equinix Inc (NASDAQ:EQIX) seems to be a highly speculative investment at this point, given its valuation and its good-but-not-great recent results, and so we would recommend avoiding it. Family Dollar Stores, Inc. (NYSE:FDO) also doesn’t seem like a buy at this time considering where it trades compared to its peers.
Disclosure: I own no shares of any stocks mentioned in this article.