Billionaire John Paulson’s Paulson & Co. has struggled following its spectacular success in shorting the U.S. housing market (and, for a while, being long gold), but Paulson remains one of the most widely followed hedge fund managers. His fund recently filed its 13F with the SEC, disclosing many of its long equity positions as of the end of March; see the filing on the SEC’s website. We track hundreds of hedge funds’ and other investors’ quarterly 13F filings as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year).
Another use of this information is to see which individual names Paulson and other managers like, using these picks as initial investment ideas and researching any that seem interesting. Most of these positions are merger arbitrage plays and Paulson’s these picks generally performed much better than his macro bets. Read on for our take on Paulson’s five largest stock holdings by market value from the 13F and compare these picks to those in previous filings.
Even after holding a large stake in Sprint Nextel Corporation (NYSE:S) at the beginning of 2013, Paulson had nearly doubled the size of his position by the end of the quarter with over 230 million shares according to the 13F. Currently, SoftBank and Dish Network are waging a takeover battle for Sprint Nextel Corporation (NYSE:S); SoftBank is farther along in the process, but Dish is trying to put together a stronger bid and also suggesting that there are potential national security concerns for allowing a SoftBank takeover. Paulson got his start in merger arbitrage; this is a somewhat attractive strategy for hedge funds as returns tend to be uncorrelated with the market.
The best of the rest
The fund disclosed ownership of nearly 15 million shares of Life Technologies Corp. (NASDAQ:LIFE), a $13 billion market cap life science instruments and supplies company which is currently in the process of being acquired by Thermo Fisher Scientific. The offer is all cash, at $76 per share (compared to the current market price of just over $74), and therefore provides a potential return of 2.7% assuming that the deal does close. However, regulatory approval is required and Thermo Fisher has suggested that the transaction will not be completed until early 2014. Leverage could increase returns, however.
Paulson loves gold (his largest position overall, in fact, is the GLD exchange-traded fund) and reported a position of over 28 million shares in gold miner AngloGold Ashanti Limited (ADR) (NYSE:AU). The past year hasn’t been good for gold miners, and AngloGold Ashanti Limited (ADR) (NYSE:AU) is no exception with its stock price falling by over 50% over this time frame. Wall Street analysts are expecting the company’s earnings to be considerably better next year, and as a result the forward P/E multiple is 6. Gold miners are one way to play higher gold prices, though investing in gold in either direction seems a bit speculative to us.
Recent IPO Realogy Holdings Corp (NYSE:RLGY)– the real estate broker and brokerage franchiser is up over 50% from its levels shortly after going public last October- was another of Paulson’s top picks. The owner of Century 21 and Coldwell Banker grew its revenue by 9% in the first quarter of 2013 versus a year earlier. Investors- likely looking for a hotter real estate market to drive higher prices and more transactions, therefore benefitting real estate brokers- expect high earnings growth at the company, whose stock currently trades at 21 times forward earnings estimates.
Rounding out the fund’s largest stock holdings is Plains Exploration & Production Company (NYSE:PXP), whose shareholders recently approved a purchase by Freeport-McMoRan Copper & Gold, which is currently expected to close within the next couple weeks. Currently, the stock is trading at $48.95; management has announced a $3 per share special dividend payable towards the end of May, with shareholders then receiving $46.01 per share at close. This makes for a negligible profit opportunity for anyone currently considering Plains Exploration & Production Company (NYSE:PXP).
John Paulson isn’t exactly everyone’s favorite hedge fund manager, but he’s worth paying attention to nonetheless. Sprint Nextel Corporation (NYSE:S) is the subject of a much-heated takeover battle, while Life Technologies Corp. (NASDAQ:LIFE) is in the process of being acquired by Thermo Fisher Scientific. Both of these situations represent attractive environments for any investor, while AngloGold Ashanti Limited (ADR) (NYSE:AU) appears to be a bet on a gold rebound. Realogy Holdings Corp (NYSE:RLGY) is an obvious play on housing with the benefit of having recently gone public, while Plains’ merger arbitrage opportunity is about finished.
Disclosure: I own no shares of any stocks mentioned in this article.