In May, billionaire John Paulson’s hedge fund Paulson & Co. filed its 13F with the SEC, disclosing many of its long equity positions as of the end of March. Even though the information in 13Fs is a bit old, there are still a couple ways for investors to potentially profit from it. For one, we’ve found that it’s possible to develop investment strategies based on 13F data; for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). We can also compare the most recent filing to the previous one to see which stocks funds added to their portfolio during the quarter. Read on for our thoughts on Paulson’s five largest new holdings as of the end of March and see a history of his stock picks.
The fund initiated a position of 5 million shares in Family Dollar Stores, Inc. (NYSE:FDO) in the first quarter of 2013. Net margins fell in Family Dollar Stores, Inc. (NYSE:FDO)’s most recent quarterly report compared to the same period in the previous fiscal year: while revenue grew at a double-digit rate, earnings were up only 3%. That’s fairly concerning given that the trailing earnings multiple of 17 would be taken to already include considerable earnings growth in the future. Trian Partners, managed by billionaire Nelson Peltz, kept its stake constant during Q1 at a little under 9 million shares (find Peltz’s favorite stocks).
InterOil Corporation (USA) (NYSE:IOC), an oil and gas company focused on production in Papua New Guinea (with exports throughout the South Pacific) was another of Paulson’s new picks with the filing disclosing ownership of 1.9 million shares. Due to steep losses in Q2 2012, InterOil Corporation (USA) (NYSE:IOC) is unprofitable on a trailing basis but the company has managed positive adjusted EPS since that time; still, the forward P/E is very high. In addition, revenue was up only 4% in its most recent quarter compared to the same period in the previous year, so we’d be skeptical that InterOil can improve significantly. The company is also a popular short target.
The 13F showed that Paulson owned 17 million shares of MGIC Investment Corp. (NYSE:MTG) after not having had any shares in his portfolio at the beginning of 2013. The $2.1 billion market cap mortgage insurance company received ratings upgrades and managed a successful offering of notes earlier this year, and positive news has helped its stock price roughly double year to date. We’d note that the stock’s beta is 3.9, reflecting extreme sensitivity to economic conditions. Blue Ridge Capital, managed by Tiger Cub John Griffin, was also buying the stock during Q1 (research more stocks Griffin was buying).
Rounding out our list of Paulson’s new stock picks was Vodafone Group Plc (ADR) (NASDAQ:VOD). The telecommunications company owns a minority stake in Verizon Wireless; billionaire David Einhorn of Greenlight Capital (check out Einhorn’s stock picks) has suggested that the relative valuations of Vodafone Group Plc (ADR) (NASDAQ:VOD) and Verizon Communications Inc. (NYSE:VZ) suggest that the market is undervaluing Vodafone’s VZW stake. In his opinion, this creates an arbitrage opportunity and also suggests that Verizon Communications Inc. (NYSE:VZ) could benefit from buying the rest of Verizon Wireless. Paulson is likely speculating that some sort of Verizon-Vodafone transaction is likely, which would be bullish for Vodafone’s stock price.
Disclosure: I own no shares of any stocks mentioned in this article.
