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5 Stocks John Paulson Is Betting On - 16398 views
BALTIMORE (Stockpickr) -- While John Paulson and his $34 billion hedge fund firm, Paulson & Co., are best-known for banking billions by betting against CDOs in advance of 2008 -- and for the reported $5 billion payday he took home last year -- more recent Wall Street drama has been putting the spotlight on this billionaire in June.
Most notable is the unfolding story with Sino-Forest (SNOFF: Pink Sheets), a Chinese forest products company, listed on the Toronto Stock Exchange under symbol TRE, that’s come under attack following a short-seller’s research reports that suggest the company is misguiding investors. While the company refutes the allegations, shares have still fallen 73% since the first day of June -- and major shareholders such as Paulson and Hank Greenberg are reported to have taken a major hit as a result.
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According to Bloomberg, Paulson’s firm may have lost $325 million on the firm’s Canadian-listed shares. While the jury’s still out on whose side to take in the Sino-Forest story, Paulson’s track record shouldn’t be ignored -- he’s still been able to generate staggering returns for his investors, after all.
That’s why we’re pulling up Paulson & Co.’s SEC filings this week to take a deeper look at the firm’s newly initiated stock positions. New positions make up a full 19% of the firm’s $34.3 billion portfolio, an allocation that suggests there are worthwhile buying opportunities right now.
Tech giant Hewlett-Packard (HPQ) has been getting considerable attention from analysts of late -- though not always for the best of reasons. In last week’s "7 Dividend Stocks to Increase Your Returns," we touched on the fact that HP’s second-quarter earnings were a complete debacle featuring a leaked internal memo that forced the firm to announce its results earlier than planned. Still, the firm’s 50% dividend increase secured it a position on the list.
For Paulson & Co., HP’s 12-cent per share dividend payout on July 6 works out to a $3 million check per quarter. But to claim that large of a payout, the firm took on a $1.02 billion position that makes up 3% of its total portfolio.
There’s ample reason to be a fan of HP, one of TheStreet Ratings'
top-rated computer hardware stocks, right now. The biggest is the firm’s work at carving out an ever-larger chunk of the enterprise IT market. Because HP’s core computer manufacturing business has largely become commoditized by major competition and low-margins, it makes sense to shift the firm’s focus to a more lucrative alternative -- enterprise IT certainly fits that bill. Important strategic acquisitions should help HP increase its income statement exposure to this niche.
With relative strength measures for technology firms looking flimsy this quarter, I’d wait for incremental profitability improvements from both the printing and enterprise IT units before taking a position in this stock.
HP shows up on a recent list of 5 Big Tech Stocks With Cash to Spend.
Paulson & Co.’s bullish bets on the timber market have hardly been relegated to overseas names. Last quarter, the firm took on a massive $780 million position in Weyerhaeuser (WY), one of the largest (and most profitable) forest products companies in the world.
Weyerhaeuser has undergone significant changes to its corporate structure in the last few years. The company sold off its corrugated packaging and packaging businesses in 2007 and 2008 and converted itself into a real estate investment trust last year to minimize its income tax exposure for investors. That essentially makes Weyerhaeuser a pure play on Pacific Northwest timberlands -- and an excellent way to get exposure to the timber market for investors uncomfortable with commodity investing.
The big bet on timber makes a lot of sense given Paulson’s vocal, bullish stance on the housing market right now. With timber demand driven largely by construction, expect firms like Weyerhaeuser to ramp up their production (and profitability) under the tailwinds of increased building.
Other big bets on Weyerhaeuser in the first quarter come from Jean-Marie Eveillard's Eagle Investment Management, with 15.6 million shares, and Martin Whitman's Third Avenue Management, with 6.4 million shares.
Alpha Natural Resources
Weyerhaeuser isn’t the only commodity-driven stock that Paulson & Co. made a big bet on last quarter. Another is coal supplier Alpha Natural Resources (ANR), a firm that mines for thermal and metallurgical coal primarily in Northern and Central Appalachia.
Like Weyerhaeuser, Alpha is undergoing a significant structural change in right now thanks to two major acquisitions. These buys should greatly increase the scale of Alpha’s business in the near-term.
While relative underperformance in coal prices doesn’t bode well for Alpha’s income generation abilities, the resultant low valuation for the industry means that it’s a strong avenue for retail investor bets on a recovery in the prices of this commodity. Even though prices have been slower develop, there are some indications that coal could be due to break out technically in the long-term, particularly if prices for alternative energy sources continue to climb.
Paulson & Co. took on a $712 million stake in Alpha Natural Resources in the last quarter. Another big bet on the stock came from Clovis Capital Management, which initiated a 500,000-share position.
Deep-discount retailer Family Dollar (FDO), one of TheStreet Ratings'
top-rated multiline retail stocks, has benefited from considerable economic tailwinds at the hands of the recession. As consumer tightened their belts and traded down, dollar store retailers such as Family Dollar saw sales increase and margins climb even as higher-priced competitors struggled to deliver growth.
While there have been some concerns that economic recovery could put the kibosh on growth at Family Dollar's stores, that thesis hasn’t yet proven itself given the tenuous nature of economic recovery in the years since 2008. Fueled by wise capital spending on store renovations and an ever-adapting product mix, Family Dollar's numbers continue to be strong in 2011.
Even though all retailers are likely to feel some margin squeeze as a result of rising input costs this year, Family Dollar's expertise in deriving relatively strong margins from low-cost merchandise should make them less susceptible then peers.
With a $177 million stake in Family Dollar, Paulson & Co. is making a sizable bet on the company in 2011. Also betting on the stock is Jim Simons' Renaissance Technologies, with a 1.8 million-share position.
Scripps Networks Interactive
Spinoff Scripps Networks Interactive (SNI) is the parent company of a number of television network brands, including HGTV, Food Network, Travel Channel and DIY. In total, the company’s television channels reach nearly 100 households. Scripps has made a strong business of focusing on the lifestyle television niche -- a focus that garners strong advertising revenues and viewer stickiness. As a result, the company is able to deliver truly impressive margin performance even in a weak advertising market.
Because Scripps owns the vast majority of its content, the company is able to leverage its library for licensing deals with other video providers -- and internally source relatively inexpensive content for its own channels. While the TV market is incredibly difficult to compete in, Scripps’ focus on a very well defined lifestyle focus means that the company is able to consistently beat out generalists -- even if the latter represent larger names.
Paulson & Co’s $150 million position represents more than 2% of SNI’s outstanding shares. Another big bet on the stock, which shows up on a recent list of stocks increasing their dividends, comes from
Gardner Russo & Gardner, with a.7 million shares.
To see the rest of the firm’s plays, check out the Paulson & Co. Portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.