John Paulson’s Paulson & Co had a great first quarter, achieving an average return of 5.6% from its 52 long positions in stocks with a market cap of over $1.0 billion, according to our returns methodology. The hedge fund’s equity portfolio was made up of 62 long positions at the end of the fourth quarter, with 43% of those holdings being in the healthcare industry, and 25% belonging to the consumer discretionary sector. Furthermore, Shire PLC (ADR) (NASDAQ:SHPG), Time Warner Cable Inc (NYSE:TWC), and DIRECTV (NASDAQ:DTV) were Paulson’s top picks at the beginning of 2015, accounting for roughly 21% of the total value of its equity holdings.
The strong focus on the healthcare industry was one of the main reasons Paulson & Co was able to beat the market this quarter. While the S&P 500 gained 0.9% in the first quarter, the healthcare sector returned an average 7.22% during the same period. Furthermore, Mr. Paulson’s hedge fund benefited from its investments in the consumer discretionary industry, which returned 6.47% since the beginning of the year.
According to its latest 13F filing, Paulson & Co held 8.33 million shares of Shire PLC (ADR) (NASDAQ:SHPG), valued at around $1.77 billion. The stock ranked as the largest position in the hedge fund’s equity portfolio at the beginning of last quarter, accounting for 9.14% of its total value. Furthermore, Paulson’s top pick had a solid performance during the first quarter, delivering a return of 12.86%, in tune with the average return of 12.13% registered by the biotechnology sector. In addition to Paulson & Co, which ranks as the company’s largest shareholder among institutional investors, numerous hedge funds were betting on Shire PLC (ADR) (NASDAQ:SHPG) this quarter. Peter Rathjens’ Arrowstreet Capital disclosed ownership of 1.28 million shares in its latest 13F filing, while Samuel Islay’s Orbimed Advisors holds 1.17 million shares.
At the beginning of the year, Paulson’s stake in Time Warner Cable Inc (NYSE:TWC) amounted to 8.69 million shares last quarter. The position was valued at roughly $1.32 billion, representing 6.82% of the hedge fund’s equity portfolio. Despite Paulson’s bullish stance (the investment firm increased its exposure to the stock by 1.37 million shares during the fourth quarter), shares of Time Warner Cable Inc (NYSE:TWC) lost 0.44% during the first quarter. Furthermore, the company is set to be taken over by Comcast Corporation (NASDAQ:CMCSA) for $45.2 billion once the acquisition is approved by the Federal Communications Commission and U.S. Department of Justice. While Paulson & Co holds a significant stake in the company, Chris Hohn’s Children’s Investment Fund is even more invested in Time Warner Cable. Mr. Hohn’s fund held 9.87 million shares of stock as of the end of 2014, valued at $1.50 billion, and accounting for almost 60% of its equity portfolio.
Excluding its ETF holdings, DIRECTV (NASDAQ:DTV) ranked as the third-largest position in Paulson’s equity portfolio last quarter, with 11.40 million shares valued at around $988.38 million. During the fourth quarter, the investment firm increased its exposure to the stock by acquiring an additional 1.0 million shares. Despite the fund’s bullish stance towards the company, the stock lost 1.85% since the beginning of the year. Furthermore, AT&T Inc. (NYSE:T) is set to complete its acquisition of DIRECTV (NASDAQ:DTV) over the next few weeks, as negotiations near their end. The deal faces little opposition from shareholders despite AT&T’s offer of $91.61 per share being somewhat of a discount deal now, compared to the $95.00 initial price tag as AT&T shares have slid by nearly 5% since the acquisition, which pays out to shareholders in cash and AT&T stock, was first announced. While Paulson has been betting on this merger play for some time now, several other investment firms also hold a significant stake in the company. Warren Buffett’s mutual fund Berkshire Hathaway for example disclosed ownership of 31.35 million shares last quarter, accounting for roughly 2.5% of its equity portfolio.
Tracking the activity of hedge funds such as Paulson & Co is vital when trying to seek out new investment opportunities for small investors. However, simply imitating the moves made by these firms does not guarantee great returns, since most of their top picks are in large-cap stocks. These equities usually don’t beat the market by a large margin, as they are often already efficiently priced. Hence, we have concentrated our efforts on gathering and analyzing information regarding the small-cap picks of more than 700 hedge funds, which resulted in a small-cap strategy that returned 132% over the past 2.5 years, and beat the S&P 500 ETF (SPY) by nearly 80 percentage points.
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