Tuesday, May 1st
2012
Published by: StreetAuthority (Austin, Texas)
Prior to the 2007 meltdown of the subprime lending market, hedge-fund
manager John Paulson was a name with a solid reputation for performance,
but not necessarily put on the same pedestal with the likes of George
Soros or Warren Buffett. The primary fund he manages, the Advantage
Fund, has averaged a 15.4% annual return since its inception in 1994.
That's solid, but not earth-shattering.
After going against the grain and betting
against the housing market in 2007, though -- and generating a $15
billion profit (a nearly 600% return) for his fund's investors as a
result -- the 56-year-old Harvard MBA grad established himself as one of
the elites among Wall Street's stock-pickers.
The money soon followed, as investors warmed
up to the idea of not following the rest of the trading crowd. Paulson
now manages $29 billion in assets, making him the head of the world's
third-largest family of hedge funds.
Though steering such a vast amount of money
makes it tough to step into off-the-radar opportunities and acquisition
targets (his favorite), Paulson still has a penchant for owning stocks
the rest of the market's key players aren't really considering.
The additions he made to the portfolio in the
fourth quarter of 2011 are no different. While they may be surprising,
his track record still makes these names worth considering yourself.
Here's a look at some of Mr. Paulson's fourth-quarter purchases that you
may also want to consider.
1. United Rentals (NYSE: URI)
An equipment rental business may not be the most riveting idea out
there, but United Rentals may well have the makings of a buyout target.
Revenue for the $2.6 billion company is
improving following the 2010 lull, and the company swung back to a
profit in the middle of last year. United Rentals also has $500 million
worth of cash and near-term receivables on the balance sheet. It's no
wonder Paulson took on a new position with the stock -- to the tune of
$20.8 million -- during the fourth-quarter.
No, United Rentals hasn't exactly been making
rounds on the rumor mill as an acquisition target. Those shares are now
worth 62% more than what Paulson paid for them, though, so he's
obviously honing in on something.
2. Delphi Automotive (NYSE: DLPH)
This $10 billion auto parts manufacturer was Paulson's biggest pick-up
last quarter. He added 51 million shares to his holdings, or $1.1
billion worth, making it his single-biggest holding (Delphi now
comprises 8% of the entire portfolio). Though only a few months old in
its current form, Delphi's forward-looking price-to-earnings (P/E) ratio
of 7.3 is appetizing.
3. Medco Health Solutions (NYSE: MHS)
The tripling of the number of shares of Medco Health the fund owns still
only got the position up to $126 million, which is a mere 0.5% of the
entire portfolio. Yet, some say Medco Health was also one of the best
decisions he made last quarter.
The health care management outfit is a
reliable revenue producer and profit generator, even if earnings growth
has slowed in the past 12 months. That's largely why Express Scripts
(Nasdaq: ESRX) wanted to buy it, per the announcement in the middle of
last quarter.
Did Paulson, who tends to play M&A and special
situations, have a gut feeling the acquisition was coming? Or, maybe he
sensed it when rumors of other mergers and buyouts in the space (like
the Omnicare (NYSE: OCR) purchase of PharMerica) started to surface.
Actually, it's not clear when he actually scooped up his Medco shares,
but with an average entry of $53.41 compared with the current price of
$63.74, it is clear his timing was spot-on.
4. El Paso Corp. (NYSE: EP)
The 4 million shares Paulson picked up at around $24 per share only
translates into $96 million worth of the $21 billion natural gas
utility. Yet, his entire purchase was new.
What's interesting is that, though off the
beaten path, Paulson wasn't the only hedge fund to step into El Paso.
Farallon Capital Management, with Thomas Steyer at the helm, also took
on a big stake. Though Paulson has not indicated what his thought
process is with El Paso Corp., we can presume his interest is the same
as Steyer's -- it's a bet on an acquisition.
5. Goodrich Corp. (NYSE: GR)
Though it's a distant second compared to Delphi, aeronautical contractor
Goodrich is a favorite for Paulson's fund. It still only makes up 1.3%
of the entire portfolio, although it should be noted the bulk of that
allocation was mustered in the fourth quarter, when 927,650 shares were
added to the 502,000 shares already held.
Risks to Consider: Even the most prolific
of fund managers have bad years, and Paulson's 2011 was pretty bad. His
flagship Advantage Plus Fund lost roughly half its value last year. Is
the worst over for the legend? You never really know until after the
fact, but...
Sometimes the path less traveled is also the most fruitful path. Despite
a lousy 2011, John Paulson has the historic numbers to prove he's worth
following. In fact, his weak 2011 may mean 2012 is the time to really
start embracing his stock ideas, as the law of averages says he's due
for strong performance. Just don't fall into the same trap he may have
fallen into last year and make a trade predominantly on the expectation
of a buyout with little regard for the fact you'll actually own the
company if it isn't acquired.
To that end, El Paso and Goodrich have already
priced in buyouts and may not have much left to give in terms of upside.
United Rentals, Delphi and Medco, however, are attractive even if they
aren't acquired, and are definitely worth further research.
-- James Brumley
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