One of the most revered names in the business, billionaire hedge fund manager John Paulson is famous for his lucrative bets against subprime mortgages in the mid-2000s. Paulson earned a $4.9 billion payout in 2010, breaking records in the hedge fund industry. Lately, however, Paulson has had to convince investors that his fund is still on the straight and narrow path—his major funds posted double-digit losses over the past year and change. The fund’s economic outlook in 2011 was rather sunny, costing the fund billions as it took on significant amounts of risk in its investments.
We will take a look here at how Paulson’s major stock picks, as disclosed in Paulson & Co.’s 13F regulatory filing, compare to his past filings, particularly looking at major up and down movements in the portfolio.
Gold is still king. John Paulson continues to load quite a bit of his portfolio with gold-related equities. His SPDR Gold Trust (GLD) is valued at $3.7 billion, or about a quarter of the total value of his 13F portfolio. But that’s not all: The top equity holding in the portfolio remains AngloGold Ashanti Limited , which, along with convertible bond issues, totals slightly over $1 billion. We explained that, in the wake of the third round of quantitative easing (QE3), gold and a variety of different commodities make ideal hedges against currency debasement and inflation. Essentially, Paulson has put his chips down on a gold ETF and a gold production company—two ways to play gold that have underperformed buying physical gold since the beginning of the year. AngloGold is down 35 percent year-over-year, and we note that it derives its revenue not only from gold but also from silver, sulfuric acid, and uranium production. The company produced about 4.3 million ounces of gold in 2011, and though its performance has not been inspiring over the past year, we are more optimistic about demand levels for gold going forward as gold becomes a more common monetary reserve asset.
More lightweight on Hartford and Delphi. Paulson’s fund decreased its holdings in Delphi Automotive PLC , which Paulson initiated as a top 5 holding in the fourth quarter of 2011. Since the beginning of 2012, shares of the company are up 47 percent. The company issued a positive third-quarter earnings report of 84 cents per share, up from 79 cents from a year ago. This comes, however, as top line growth is starting to pressure earnings (revenue fell 6 percent) and as the company begins significant strategic readjustments in the slow European markets, so Paulson’s move to take profits here makes sense. Paulson still has a significant stake in the company, though, and other optimists like billionaire hedge fund manager Steven Cohen are also keen on Delphi and the automotive industry generally, as we noted in a previous article.
Paulson also cashed in nearly 12 million shares of Hartford Financial Services Group , a major insurance provider for individuals and businesses in the United States. With shares of the company up about 26 percent year-to-date, we also see a rationale for profit-taking in this still sizable holding. However, Hartford still looks like a good value play according to historical valuations. Shares are trading at about 6 times forward consensus earnings estimates, which is well below the 10-year range of 7 to 28. Shares are trading at their lowest valuations on a P/E basis since 2002. If you add in a successful reconstruction—which is already well underway—we could see a significant bump in Hartford shares.
More heavyweight in technology. Paulson’s portfolio has beefed up some of its top 10 technology holdings. Particularly, his holdings of Life Technologies have increased to 13.5 million shares valued at a total $660 million. Another mid-cap like Delphi, Hartford, and AngloGold Ashanti, Life Technologies produces a number of specialty products for use of life sciences and life science research. Up 18 percent year-to-date, shares are still only trading at 11 times forward consensus earnings, and Paulson likely sees several catalysts for growth. The company stands to make considerable headway in genomics and molecular diagnostics markets, though, as S&P notes, its next-generation sequencing platform SOLiD sells a significantly higher price point than that of many of its major competitors. Illumina (ILMN) is also expected to come out with a sequencing platform by year’s end, adding to competition in this area—a source of caution for investors.