Here’s How Billionaire John Paulson Traded Valeant and His Other Top Stock Picks Last Quarter

Hedge fund manager John Paulson, who founded Paulson & Co. back in 1994, has become very popular since he made a fortune betting against subprime mortgages in 2007. The billionaire investor started his hedge fund with only $2 million, and currently oversees more than $19 billion in assets. However, Paulson & Co. cannot be generally considered as a consistent hedge fund firm, thanks to the significant losses that it incurred in 2011 and 2012. Even so, Paulson’s decision to buy credit-default insurance against subprime mortgages points to the fact that he has a different and well-thought view on the markets and the U.S economy in general. The value of Paulson & Co.’s equity portfolio declined to $19.27 billion from $21.69 billion during the third quarter, owing to the turmoil in the stock markets and the fund’s rebalancing efforts. Having said that, let’s proceed with a discussion of John Paulson’s top stock picks at the end of the September quarter and their recent performance.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 48.7% gain) over the last 38 months (see the details here).

#5 Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT)

 – Shares Owned by Paulson & Co. (as of September 30): 15.60 Million

 – Value of Holding (as of September 30): $1.04 Billion

Paulson & Co. lifted its stake in Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT) by 3.60 million shares during the third quarter. Earlier this week, Marriott International Inc. (NASDAQ:MAR) announced an agreement to buy the hotel and leisure company for approximately $12.2 billion, which would create the world’s largest lodging company. Under the terms of the merger agreement, Starwood’s shareholders are set to receive $2.00 in cash and 0.92 shares of Marriott common stock for each share of Starwood, which yields a compensation of roughly $68.95 per share at the time of writing. Marriott’s management anticipates that the merger could result in at least $200 million in annual cost savings in the second full-year after closing the merger. Daniel S. Och’s OZ Management added 4.97 million shares to its position in Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT) during the third quarter, which amounted to 11.24 million shares on September 30.

#4 Shire PLC (ADR) (NASDAQ:SHPG)

 – Shares Owned by Paulson & Co. (as of September 30): 6.81 Million

 – Value of Holding (as of September 30): $1.40 Billion

John Paulson’s hedge fund firm cut its exposure to Shire PLC (ADR) (NASDAQ:SHPG) by 289,900 shares during the September quarter, remaining with 6.81 million shares. Earlier this month, the biopharmaceutical company agreed to acquire Dyax Corp. (NASDAQ:DYAX) for $37.30 in cash per Dyax share, which yields an aggregate value of $5.9 billion. Just recently, Leerink Partners upgraded Shire to ‘Outperform’ from ‘Market Perform’ and raised its price target on the company’s stock to $239 from $220, citing recent promising OPUS-3 study results and the acquisition of Dyax. These recent developments could eventually bring in two high-potential drugs to Shire’s drug portfolio, which could boost the company’s top-line in the future. Samuel Isaly’s Orbimed Advisors reduced its position in Shire PLC (ADR) (NASDAQ:SHPG) by 641,600 shares during the latest quarter, owning 664,400 shares at the end of September.

#3 Time Warner Cable Inc. (NYSE:TWC)

 – Shares Owned by Paulson & Co. (as of September 30): 8.12 Million

 – Value of Holding (as of September 30): $1.46 Billion

Paulson & Co.’s position in Time Warner Cable Inc. (NYSE:TWC) was untouched during the bloody third quarter at 8.12 million shares. Charter Communications Inc. (NASDAQ:CHTR) recently asserted that its acquisition of TWC is expected to be finalized in the first quarter of 2016, with the $78.7 billion cash-and-stock deal still awaiting federal regulatory approval. The aforementioned deal, which had previously been expected to close by the end of 2015, is subject to meticulous regulatory scrutiny, as it is set to create the leading broadband services and technology company. Some believe that the Charter-TWC merger is not in the best interests of the public and should be denied as a result. Just recently, DISH Network Corp (NASDAQ:DISH) filed a petition that asked the Federal Communications Commission (FCC) to deny the merger, mentioning that both competitors and consumers would suffer should it go through. Eric W. Mandelblatt’s Soroban Capital Partners reported owning 7.62 million shares in Time Warner Cable Inc. (NYSE:TWC) through the latest round of 13F filings.

#2 Valeant Pharmaceuticals Intl Inc. (NYSE:VRX)

 – Shares Owned by Paulson & Co. (as of September 30): 8.89 Million

 – Value of Holding (as of September 30): $1.59 Billion

John Paulson’s firm decreased its position in the highly-scrutinized Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) by 110,000 shares during the third quarter. The pharmaceutical company had a terrible third quarter in terms of stock performance, while the fourth quarter has turned out to be even worse thus far. The shares of the company are 50% in the red year-to-date, as investors’ growing concerns about Valeant’s business model have put significant weight on the stock. Investors worry that Valeant may not succeed in sustaining its growth levels without pursuing mergers and acquisitions and raising the prices of the drugs the company acquires. Even more to that, some investors are also skeptical about Valeant’s recent financial figures. On the other hand, the stock may represent a great buying opportunity if considering its forward price-to-earnings ratio of 4.71, which is substantially below the median of 17.25 for the S&P 500 (assuming that analysts’ earnings expectations are accurate). Bill Ackman’s Pershing Square suffered significant losses on its investment in Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) during the third quarter, as it owns 19.47 million shares as of September 30.

#1 Allergan PLC (NYSE:AGN)

 – Shares Owned by Paulson & Co. (as of September 30): 7.18 Million

 – Value of Holding (as of September 30): $1.95 Million

Allergan PLC (NYSE:AGN) was the largest equity holding of billionaire John Paulson at the end of the September quarter, representing 10.13% of the fund’s portfolio value on September 30. Paulson & Co. increased its position in the pharmaceutical giant by a mere 7,800 shares during the three-month period. According to a recent article published by Bloomberg, Dan Loeb of Third Point believes that a merger between Allergan and Amgen Inc. (NASDAQ:AMGN) is quite possible and could unlock multiple channels for growth. Loeb suggested that the healthcare sell-off that occurred during the third quarter made a potential investment in Allergan even more attractive, but also asserted that Allergan’s growth potential makes the company stand out from the crowd. Just recently, Mizuho reiterated its ‘Buy’ rating on the stock and raised its price target to $340 from $337, which yields an upside of 14%. Allergan PLC (NYSE:AGN) was the third-largest equity holding of Dan Loeb at the end of the third quarter (read more details).

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