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How to Make $1.7 Billion in One Year - 25188 views
John Paulson made so many smart bets in 2007, one of the most-difficult years for this market that we've seen in some time, that he made $1.7 billion for himself for the year. No hedge fund was more successful in 2007 than Paulson's, which was up a whopping 435% for the year. Halfway through 2008, Paulson & Co. is striking again, up 26%, vs. -15% for the S&P 500.
Formed by John Paulson of Queens, N.Y., ironically a former Bear Stearns banker, the fund bet that the subprime market would collapse in 2007 and throughout 2008. Paulson & Co.’s primary method was to buy credit default swaps, commonly known as CDS’s, on various financial institutions and indexes.
With credit easily available and the housing market still enacted, credit default swaps on money center banks and homebuilders were trading for almost nothing. By all accounts, Paulson was risking 3% to 5% of his entire portfolio by buying these credit default swaps, with the possibility of making 10 times to 40 times his entire portfolio if things got really nasty.
With the housing market all but collapsed and most financial companies fighting to stay alive, Paulson & Company raked in $20 billion in profits in 2007, netting its manager $3.5 billion in personal income in 2007 propelling him to No. 165 on the Forbes 400 list of the wealthiest Americans.
Paulson & Company also has substantial equity positions, all of which we actively track on Stockpickr.
The firm’s largest position is in Yahoo! (YHOO). Paulson & Co. owns 50 million shares, all of which were purchased after Yahoo! botched a possible merger with Microsoft (MSFT).
Paulson has already said that it will support Carl Icahn in his attempt to extract value out of Yahoo! shares.
The firm is also the largest shareholder in Boston Scientific (BSX), owning about 80 million shares and thus controlling about 5.5% of the company
Boston Scientific, which is up about 10% for the year, specializes in stents for the heart. It has a PEG ratio of 1.27 and a forward P/E of 19, and it's a good, defensive place for investors to hide in this tough market.
Last quarter, Paulson & Company also added to its stake in Mirant (MIR) by 2 million shares, bring its total position to 21 million shares and giving the firm a controlling stake of 9.86%.
Mirant produces and sells electricity and also offers platforms to trade and hedge against electricity. Paulson is making a bet on clean energy, specifically electricity. Mirant has a forward P/E of 9.49, a PEG ratio of 0.81 and almost $2 billion in cash in the bank.
Lastly, the firm also owns Alcoa (AA), which just surprised Wall Street with its positive earnings, and ChoicePoint (CPS), which provides identification and credential verification services in the U.S.
A note from James Altucher:
Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.
Here are some examples:
Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.