Here's What Billionaire John Paulson Has Been Buying

Every quarter, many money managers have to disclose what they've bought and sold, via "13F" filings. Their latest moves can shine a bright light on smart stock picks.

Today, let's look at investing giant John Paulson. Founded in 1994 and owned by its employees, Paulson & Co. has specialized in merger arbitrage, among other things, profiting when one company buys or merges with another (or merely announces plans to do so). It has grown into one of the largest hedge fund companies in the world.

Is Paulson really worth paying attention to, though? Well, according to the folks at GuruFocus.com, Paulson gained about 264% over the 15 years through 2011, compared with just 124% for the S&P 500. That certainly gets my attention. His performance faltered in 2011 and 2012, though, reminding us that even the big guys are not perfect and that we should think twice before mindlessly following anyone.

The company's reportable stock portfolio totaled $17.7 billion in value as of March 31, 2013. Its biggest holding by far is the SPDR Gold Trust, with about 19% of assets. Gold has long had its advocates and critics (who include Warren Buffett), but as my colleague Dan Caplinger has noted, it all comes down to supply and demand.

Interesting developments
So what does Paulson's latest quarterly 13F filing tell us? Here are a few interesting details:

The biggest new holdings are Family Dollar and Hess. Other new holdings of interest include InterOil (NYSE: IOC  ) and MGIC Investment (NYSE: MTG  ) . InterOil has many investors excited about its potential, as it has major natural gas holdings in Papua New Guinea that could serve regions in Asia. Its earnings have been paltry or negative in recent years, though, and it's free cash flow negative as well. It looks overvalued to some but undervalued to others, and patience seems to be required.

Mortgage insurer MGIC is poised to profit from the recovering housing market, and it has been cleaning up its balance sheet over the past few years, though some don't see it as sufficiently impressive yet. The company is also looking to significantly hike its number of shares, thus shrinking the value of existing shareholders' holdings.

Among holdings in which Paulson & Co. increased its stake was Genworth Financial (NYSE: GNW  ) . Genworth has surged some 20% since my colleague Robert Eberhard called it cheap back in March, but it still sports a forward P/E ratio near 7.3, well below its five-year average. It recently reported quarterly net income more than doubling, and has been making itself more attractive, in part by selling off its wealth management business. It's also working on raising its rates for its long-term care insurance, as that has become quite costly (causing some rivals to simply exit the business) – and its well positioned to profit from a rebound in housing.

Paulson & Co. reduced its stake in lots of companies, including coal producer Alpha Natural Resources (NYSE: ANR  ) . The company, like others in its industry, has been whacked by low natural gas prices that have left coal looking relatively unattractive to utility companies, shareholders, and others. The company has been adapting by cutting costs and focusing more on metallurgical coal, which is used to make steel. Its last earnings report was better than expected.

Finally, Paulson's biggest closed positions included Nexen and Ralcorp Holdings. Other closed positions of interest include Murphy Oil (NYSE: MUR  ) , which has surged nearly 50% over the past year and which will split itself in two later this year, separating the downstream refining and retailing business from the rest of the company. In its last quarter, the company's revenue slipped a bit, missing expectations, but its earnings exceeded them, rising 26% over year-ago levels. Management pointed to particular production success in the Eagle Ford shale region.

We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for our portfolios.

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  • Report this Comment On May 19, 2013, at 12:13 AM, shirtbrigade wrote:

    Your Interoil analysis is a little off base. None of the serious longs who bought it, bought it for revenues or earnings based on the existing infrastructure, rather, that the gas and liquids inside the wells already discovered, must be processed and marketed in Asia. Asian markets pay substantially higher pricing than the US, as much as 3 fold higher. The company has trillions of units of stranded gas and liquids, based on the lack of a local processing facility and port. The company hired Morgan Stanley, UBS Warburg and MacQuarie, they solicited bids, they have bids from supermajors (Shell is identified as one of the bidders in recent third party press) and the world's largest LNG producer (per the latest PNG industry news) and the purpose of these bids is to build a refining and shipping capacity near the 4 million acres IOC operates. To entice cash into the deal, IOC is selling down a portion of its EA wells (reserves). EA is an enormous find and rates as one of the largest in the hemisphere. This speaks loudly as to what else the 4 million acres may contain. Per IOC's Chairman of the Board, in the conference call just ended and picked up by Bloomberg, IOC is at the very last stage of this selection process. It will be decided, even before they select a new CEO, which is also under way. It is even stated in a Reymond James report, the selection of the Supermajor has been made already. Reasonable calculations of the sell down, cause the pps potential just after sell down, to fall into the range of $ 150 - $ 200 per share. Short interest, however, could propel the stock higher. This will happen overnight. I believe Paulson did not buy 1870000 new shares because he felt the revenues or earnings were doing OK. I believe he was advised to do it because 4 million additional acres with potentially 50 new wells and 10-20 times more capacity of LNG will free up because a processing facility and shipping port will be constructed near IOCs 4 million acres. IOC keeps all of its development of all its new wells and this could easily propel the stock to 4 times its post sell down pps. Or, 500+ a share. Split adjusted and over time. These numbers are worthy of careful diligence. The nay sayer argument had been that IOC greatly overstated its reserves. Well then, how did they get this far with Morgan Stanley, UBS and MacQuarie? And how did they attract such large players? The short "thesis" have all worn out, and the final decision is coming, as soon as this week. That's the bottom line. If shorts want to play like the company utterly abused the investing community, Paulson was just smitten and 3 huge IBs have viewed the sell down process and taken it to near closure at this moment. It seems pretty far fetched that IOC said anything inconsistent with its reserves and capacity. That's why the stock is 90 a share, why Paulson bought in and why its going to $ 150 very, very "shortly", no pun intended.

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