Gold. Paulson still likes gold: he increased his position in GLD from 17.3 million shares to 21.8 million- a 26% increase in what had already been the largest position reported on his 13F- with very small sales of his positions in Anglogold Asahanti (NYSE:AU) and Gold Fields (NYSE:GFI) keeping these companies in the top ten positions on his filing. Sell-side analysts think that both stocks are bargains: Anglogold Ashanti trades at eight times forward earnings estimates while Gold Fields has a forward P/E of 7. However, both are trading well lower than they were a year ago. In the case of gold, we can be pretty sure that there isn’t much of a value case to be made: Paulson thinks the price of gold is going up, whether because of higher inflation or because of strong global macro pushing up demand. We’re skeptical of macro demand given the potential for lower growth in the developing world and a recession in Europe, and while it is possible that central banks around the world will coordinate (or independently launch) massive expansionary monetary policy we don’t think an inflation hedge should be the core of an investment portfolio.
Backing out of Delphi. Auto parts company Delphi (NYSE:DLPH)- though the company makes higher-end systems such as electronics, safety, and fuel injection- saw Paulson sell 13.2 million shares, reducing the fund’s stake to 32.3 million. This is still a large position, but the manager doesn’t seem to be as optimistic about the $9.2 billion market cap company as he has been in the past. Delphi trades at only seven times forward earnings estimates and a five-year PEG of 0.5, but does have a good deal of exposure to a rocky auto market and in particular to a troubled macro situation in Europe.
HCA. We asked if HCA Holdings is a good stock to buy earlier this month. Paulson apparently asked himself and his team that question during the second quarter, and their answer was “yes.” At the beginning of April the fund owned 1.6 million shares of the company, which operates a network of hospitals; by the end of June it owned 8 million shares. We had noted at the time we discussed the company that it was trading at value levels, including four times trailing earnings. On a forward basis the numbers worsen a little, with a forward P/E of 7, but over the longer term sell-side analysts expect earnings growth and the five-year PEG ratio is a rather low 0.7. Hospitals also got a bit of a bump in the second quarter as the Supreme Court’s decision on the federal health care law creates more certainty that they will be paid for treating uninsured patients. We had thought that some other hospital stocks were better buys, but we can understand Paulson buying on a value basis (particularly as the peer stocks tended to have lower market caps).
There really isn’t much to say about gold: either you like it or you don’t. Paulson does, and he has certainly made some money in the commodity in the past, and we see a scenario in which this investment pays off, but we would prefer the higher-probability payoffs from value stocks. Between his investment there and his emphasis on hospitals over auto parts, we see Paulson as getting bearish on the global economy (which could itself be taken as a recommendation to make more defensive investments).
