In the last few years, we have seen billionaire John Paulson transform from a money manager who bets big on activist and merger deals to an activist investor himself. However, it seems that activist investing didn’t help his fund, Paulson & Co. much in 2015. According to our analysis, the long positions that Paulson & Co. held in companies worth at least $1 billion during 2015 delivered a weighted average returns loss of 4.7% for the year. While that performance is nothing to write home about, Mr. Paulson can find some solace in the fact that some of his fellow activist investors fared even worse in 2015. By using the same metric detailed above, we estimated that the qualifying stock picks of Carl Icahn‘s Icahn Capital LP and Bill Ackman‘s Pershing Square lost 17.3% and 21.7% respectively in 2015. Since we don’t include a fund’s short positions or its investments in currencies, bonds, options, or long positions in smaller companies in our calculations, the actual returns delivered by a fund might differ greatly from our estimate.
Paulson & Co. recently submitted its latest 13F filing with the Securities and Exchange Commission, which revealed that its U.S equity portfolio was worth almost $16.73 billion at the end of December, a 13% drop from the end of September. The filing also revealed that stocks from the healthcare sector amassed over half (55%) of the value of Paulson & Co.’s equity portfolio. Let’s proceed to analyzing the top five moves made by the fund during the final quarter of 2015.
But first let’s understand why we track prominent investors and hedge funds. We do so 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 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).
American International Group Inc (NYSE:AIG)
– Shares Owned by Paulson & Co. (as of December 31): 11.6 million
– Value of Holding (as of December 31): $719.05 Million
Let’s start with American International Group Inc (NYSE:AIG), in which the fund reduced its stake by 20% during the fourth quarter. The fund initiated its position in AIG during the first quarter of 2015 and in October 2015 joined Carl Icahn’s Icahn Capital LP in its endeavor to break up the company. That activism paid off recently when on February 11, along with the disappointing numbers the company released for the fourth quarter, it also announced that Mr. Paulson and Samuel Merksamer, a managing director at Icahn Capital, will be joining its Board. While analysts had expected the company to report a loss per share of $0.93 on revenue of $13.83 billion, American International Group Inc (NYSE:AIG) reported a loss per share of $1.10. According to its latest regulatory filing, Icahn Capital LP owned 42.75 million shares of American International Group Inc (NYSE:AIG) as of February 1, 2016.
Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT)
– Shares Owned by Paulson & Co. (as of December 31): 11.6 million
– Value of Holding (as of December 31): $803.88 million
During the same quarter in which Marriott International Inc (NASDAQ:MAR) announced its $12.2 billion bid for Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT), Paulson & Co. reduced its stake in the latter company by 25%. Though Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT)’s stock had been on a gradual decline since November, it recently altered course in anticipation of the company’s fourth quarter results. Despite facing currency headwinds during the quarter, Starwood Hotels & Resorts managed to deliver an earnings beat on February 18, reporting EPS of $0.89 versus analysts’ consensus estimate of $0.79. Revenue of $1.44 billion was in-line with estimates. Analysts at Morgan Stanley reduced their price target on the stock to $75 from $78 following the earnings release however. Andreas Halvorsen‘s Viking Global sold its entire stake of 5.2 million shares of Starwood Hotels & Resorts Worldwide Inc during the October-to-December period.
Time Warner Cable Inc (NYSE:TWC)
– Shares Owned by Paulson & Co. (as of December 31): 5.87 million
– Value of Holding (as of December 31): $1.09 billion
Moving on, Time Warner Cable Inc (NYSE:TWC) was another company in which Paulson & Co. reduced its stake substantially during the fourth quarter, by 27%. Considering that Time Warner Cable Inc (NYSE:TWC) is among the few large-cap companies that is trading in the green so far this year, it might seem that the fund didn’t make the right move in doing so. However, one must also take into account that the $55 billion Time Warner Cable/Charter Communications Inc. (NASDAQ:CHTR) deal is facing intense scrutiny from regulators and there is still a chance that it won’t be approved, hence the fund might have reduced its stake just to safeguard itself in case the deal fails to materialize. On January 30, analysts at RBC Capital reiterated their ‘Sector Perform’ rating on Time Warner Cable’s stock, but reduced their price target on it to $190 from $204. Thomas Steyer‘s Farallon Capital reduced its stake in the company by 2% to 3.3 million shares during the fourth quarter.
Valeant Pharmaceuticals Intl Inc (NYSE:VRX)
– Shares Owned by Paulson & Co. (as of December 31): 13.26 million
– Value of Holding (as of December 31): $1.35 billion
Shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) have fallen off a cliff since August, losing over 60% of their value since then. However, Paulson & Co. displayed its conviction on the stock during the fourth quarter, when the stock fell by over 43%, increasing its stake in the company by 49%. The fall in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been so excruciating for Mr. Paulson’s peer Bill Ackman released an apology letter to Pershing Square’s investors in January stating,
“When the stock price rose this summer to the mid-$200s per share, we did not sell as we believed it was probable the company would likely complete additional transactions that would meaningfully increase intrinsic value. In retrospect, this was a very costly mistake.”
Valeant Pharmaceuticals is slated to report its fourth quarter numbers next week and analysts’ estimate that it will report EPS of $2.60 on revenue of $2.76 billion. For the same quarter of the previous year, the company reported EPS of $2.58 on revenue of $2.28 billion. According to a recent regulatory filing by Pershing Square, it has again increased its stake in Valeant Pharmaceuticals and owns 30.71 million shares of the company as of February 5.
Allergan plc Ordinary Shares (NYSE:AGN)
– Shares Owned by Paulson & Co. (as of December 31): 5.53 million
– Value of Holding (as of December 31): $1.73 billion
Despite Paulson & Co. reducing its stake in Allergan plc Ordinary Shares (NYSE:AGN) by 22% during the fourth quarter, the company still remained the fund’s largest equity holding at the end of December. Shares of the company have lost over 13% of their value since Pfizer Inc. (NYSE:PFE) announced on November 24 that it would be acquiring the company for $160 billion. Since this deal has also come under intense scrutiny from regulators and has been facing a lot of flak from lawmakers, it seems Paulson & Co. is trying to cut its risk by reducing its stake in the company. However, unlike with Time Warner Cable Inc, it seems the fund made the right call by reducing its stake in Allergan plc Ordinary Shares (NYSE:AGN), as shares are down by 11% year-to-date. On February 4, Allergan reported its fourth quarter financial numbers, declaring EPS of $3.48 on revenue of $4.10 billion topping analysts’ consensus estimate of $3.18 in EPS, but widely missing on revenue estimates of $5.71 billion.