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Extended Stay, Houghton Mifflin & Cobalt International Energy Are Billionaire John Paulson’s Top Holdings from Small-Cap Space

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Billionaire John Paulson of Paulson & Co is a hedge fund manager, who became famous for his bets against subprime mortgages. Before that, he was relatively unknown and pursuing a merger arbitrage strategy with relatively mediocre returns. Paulson & Co, disclosed an equity portfolio valued at some $19.36 billion as of the end of 2014, representing a 19.6% decrease from the previous quarter. The equity portfolio is mainly invested in Healthcare (43%), Consumer Discretionary (25%), and Energy (9%) stocks.PAULSON & CO

Mr. Paulson’s largest holdings are represented mostly by large-cap companies and many of the companies at the top of the list are the investor’s merger plays. However, in this article we will take a look at three smaller companies, in which Paulson & Co. disclosed long positions as of the end of 2014. These companies are Extended Stay America Inc (NYSE:STAY), Houghton Mifflin Harcourt Co (NASDAQ:HMHC) and Cobalt International Energy, Inc. (NYSE:CIE). They all have market caps below $4.0 billion and are of particular interest for us, since they are from the same space among stocks we analyze within our small-cap strategy.

A general idea among smaller investors is that following hedge funds’ moves disclosed through filings with the Securities and Exchange Commission, can provide some interesting insights that could help in generating market-beating returns. However, the part that many people are getting wrong is that they tend to imitate hedge fund picks’ from the large-cap space. However, our backtests of a portfolio consisting of 50 most popular picks among hedge funds underperformed the market by 7.0 basis points per month between 1999 and 2012 (read more details here). On the other hand, small-cap picks have a better chance of helping an investor to beat the market, since our small-cap strategy returned 132% since the end of August 2012 until March 2015 and beat the market by 79 percentage points.

As of the end of 2014, Extended Stay America Inc (NYSE:STAY) represents Paulson’s seventh-largest holding in terms of value. The fund holds 47.66 million shares of the company valued at $920.35 million. The position represents 4.75% of the equity portfolio and remained flat over the last quarter of 2014.  The fund initiated a position with 55.72 million shares during the fourth quarter of 2013. Meanwhile, during 2014, the stock of Extended Stay declined by 25%.

Extended Stay America Inc (NYSE:STAY) develops, owns, and operates hotels in the United States and Canada. The company’s revenue increased by 5.2% on the year to $282.7 million, while the year ended December 31, 2014, total revenue by 7.1% to $1.21 billion. Further, the net loss for the quarter expanded to $58.31 million from $10.94 million a year earlier. Full-year net income amounted to $40 million, compared to $86 million in 2013. For the current year, revenue is expected to increase in the range of 5% to 7% ($1.275 billion to $1.3 billion), and net income is anticipated to range from $183.8 million to $205.6 million. A relevant measure for hotel companies is the revenue per available room (RevPAR), which in Extended Stay’s case grew by 5.3% year over year in 2014 due to an improvement in average daily rate (ADR) of 7.8% which offset the decline in occupancy.

Several investors reported long positions in Extended Stay America Inc (NYSE:STAY), including Mark T. Gallogly’s Centerbridge Partners and Jeffrey Furber’s Aew Capital Management, which own 47.66 million shares and 2.23 million shares respectively.

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