Paulson & Co., the hedge fund managed by billionaire John Paulson has been struggling in recent times due to large positions in gold and gold miners. We have gone through the fund’s most recent 13F filing, for the first quarter of 2013; we track these quarterly filings, which disclose many of a hedge fund’s long equity positions as of the end of the quarter, in our database with the included information being used to help us develop investing strategies. For example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year. We also like to screen picks from individual managers- for example, we can look for stocks with low earnings multiples so that investors can skim these names for potential value opportunities. Here are the five largest positions in Paulson’s portfolio at the end of March which have both trailing and forward P/Es of 13 or lower (or see the full list of Paulson’s stock picks):
The fund increased the size of its position in Aetna Inc (NYSE:AET) by 44% during the first quarter of 2013, to a total of 6.5 million shares. The health insurer experienced a 7% increase in revenue in its most recent quarter compared to the same period in the previous year, though earnings were down. Aetna Inc (NYSE:AET) is valued at 13 times trailing earnings, and we’d note that Wall Street analysts expect an increase in earnings per share on a forward basis; the low multiples are likely due to uncertainty over future regulation of insurers.
Paulson and his team owned 9 million shares of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), a miner which appeals to Paulson’s bullishness on gold and is also tied to the global economy (its beta is 2.4) on copper production. The stock is currently down sharply from its levels late last year after the company purchased two oil and gas E&P companies, which threatens to diversify Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and weaken management’s focus, though this has left it with low earnings multiples. Billionaire Leon Cooperman’s Omega Advisors reported a position of 3.1 million shares in its own 13F (find Cooperman’s favorite stocks).
According to the 13F, Paulson bought 2.7 million shares of Hess Corp. (NYSE:HES) between January and March. Hess Corp. (NYSE:HES), following pressure from activists, is likely to spin out its downstream businesses. Many value investors like spinout situations because management of the new company (as well as that of the parent) is better able to focus on core operations. At its current market capitalization, Hess trades at 10 times consensus earnings for 2014 and the company has been reporting growth on both top and bottom lines, so not much improvement is required here.
The fund cut its stake in $16 billion market cap hospital company HCA Holdings Inc (NYSE:HCA) by about 50%, but still owned 3.4 million shares of stock at the beginning of April. Net income was down over 30% last quarter compared to the first quarter of 2012 on flat revenue. The sell-side expects that poor performance to reverse over the next year, and with the market not being too optimistic about HCA Holdings Inc (NYSE:HCA) (possibly due to uncertainty again), the trailing and forward P/Es come in at 12 and 10 respectively.
Rock-Tenn Company (NYSE:RKT) rounds out our list of Paulson’s cheap stock picks, as the fund disclosed ownership of 1.4 million shares of the packaging products company in the filing. After nearly doubling in price over the last year, Rock-Tenn Company (NYSE:RKT) still features a trailing earnings multiple of only 13. Revenue was up only slightly in the first quarter of 2013 versus a year earlier (with much better net margins), but the stock is priced low enough that even modest future growth could make it a potential value play. As such we’d be interested in taking a close look at Rock-Tenn.
In addition to Rock-Tenn, Hess also offers a combination of decent recent performance and an attractive valuation (though many oil and gas companies are cheap at this time). We’re also interested in Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), as while we aren’t fans of management’s acquisitions it is possible that investors have overestimated the amount of shareholder value these deals have put at risk and thus overreacted to the news.
Disclosure: I own no shares of any stocks mentioned in this article.