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John Paulson’s Top Stock Picks in 2012

PAULSON & COEven after a disastrous 2011 with his flagship Paulson Advantage down 35.9% after fees and the Paulson Advantage Plus down 50.7% after fees, John Paulson, head of Paulson & Co., still has a net worth of $12.5 billion. Much of the poor performance is attributed to his being too early on the US recovery and investments in Chinese “fraud-cap” company Sino-Forest. Born in Queens, New York to an Ecuadorian father and French/Norwegian mother, Paulson attended New York University to study creative writing, before dropping out to travel to South America, picking up some unique experiences in manufacturing along the way. Three years later, Paulson returned to NYU and graduated in 1978 with a degree in finance. He then applied directly to Harvard Business School at 22, and went on to graduate as a Baker Scholar, representing the top 5% of his MBA class. After graduating from HBS, Paulson joined the prestigious Boston Consulting Group but was not satisfied in just giving advices to companies, so he left to join Odyssey Partners. Paulson eventually ended up in M&A at Bear Stearns, and in 1994, founded Paulson & Co. with $2 million of his own capital.

It wasn’t until 2007 that Paulson made it onto the billionaire list in by shorting subprime securities, netting him $3.5 billion. Little is known about his investment strategy as he never gives interviews and is very secretive about his methods. It is said that he “embeds hi-tech software in his emails to prevent them being forwarded.” He has however, been a major proponent of going long gold.

John Paulson’s top 10 holdings:

Company Ticker Value ($000s) Activity
SPDR GOLD TRUST GLD 2,806,452 0%
DELPHI AUTOMOTIVE PLC DLPH 1,438,898 -12%
ANGLOGOLD ASHANTI LTD AU 1,224,358 -3%
HARTFORD FINANCIAL SVCS GRP INC HIG 789,882 0%
MYLAN INC MYL 574,605 16%
M G M RESORTS INTERNATIONAL MGM 512,782 1%
ANADARKO PETROLEUM CORP APC 468,657 -38%
CAPITAL ONE FINANCIAL CORP COF 457,068 -14%
MOTOROLA MOBILITY HOLDINGS INC MMI 431,640 0%
BAXTER INTERNATIONAL INC BAX 322,812 89%

Johnson has been very bullish on gold companies, especially AngloGold Ashanti (NYSE:AU) but reduced positions in the company likely due to pressure from investors as gold underperformed the quarter and most of last year. Although Paulson reduced the position’s size, it still remains the fund’s third largest holding. After the military coup caused a huge drop in the stock’s price, which has yet to recover fully, we continue to prefer it over number one gold producer Barrick Gold (ABX) and number two gold producer Newmont Mining (NEM) for valuation reasons. AU’s safety statistics have shown meaningful improvement with the injury frequency rate down 63% over four years, and there are promising new projects in the United States, South America, and Continental Africa that are expected to increase production by 27% by 2015. When the market acknowledges AU’s achievements, the shares should outperform. Despite AU’s strong operational performance, it trades at a discount to its peer group. Paulson estimates that AU shares trade at 6.9x EV/EBITDA versus other large producers that trade at much higher multiples, Harmony (NYSE: HMY) at 10.5x, Newcrest (ASX: NCM) at 11.1x, and Goldcorp (NYSE: GG) at 13.0x. We are equally bullish on AU in addition to gold equities in general that have underperformed both by S&P 500 standards and by gold price standards. Billionaire Jim Simons’ Renaissance Technologies doubled its AU stake during the first quarter. Unlike many other hedge fund managers that are most concentrated in Technology, Paulson’s top weightings are in Financials, Basic Materials, and Healthcare.

John Paulson trimmed his long-time holding Capital One (NYSE:COF) by 14% during the first quarter. We believe that COF is superior to ING Group (ING), American Express (NYSE:AXP), and Discover Financial Services (DFS), especially from a valuation standpoint. Capital One trades at ~7.9x 2013 earnings, which is below AXP, which trades at ~11.8x and DFS which trades at ~9.1x. The peer group at large trades at ~10.2x. The Comprehensive Capital Analysis and Review (CCAR), which stress tests and reviews capital plans of the 19 largest U.S. bank holding companies reported COF had minimum Tier 1 Common capital ratio of 7.8%, a strong number. And though COF shares have done very well YTD, we think there could be additional upside if management executes a smooth integration for ING Direct and HSBC Card operations and continues to increase loan growth. Billionaire Dan Loeb recently initiated a brand new position in COF, while American Express is a long-time favorite of Warren Buffett.

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