Here Are The Changes Paulson & Co. Made To Its Portfolio To Recover After a Bad 2016

2016 was unarguably one of the worst years for John Paulson‘s Paulson & Co. since its inception in 1994. According to a recent report by hedge-fund investor LCH Investments NV, the New York-based hedge fund that gained immense fame from its ‘Big Short’ on subprime securities in 2007-08 and became one of the largest and most famous hedge funds in the world post that, lost $3 billion of investors’ money in 2016.

Whether looked collectively or in isolation, the $3 billion figure is a significant amount to be lost by a firm in a single year. As a matter of fact, the chiefs of most publicly listed companies would have been forced to resign from their positions if they post such a large loss in a single year. Nevertheless, Mr. Paulson is known for bouncing back from lows quite fast and having the appetite to digest heavy losses for a long time, something that he proved quite successfully while holding on to his housing shorts before the financial crisis erupted.

This time too, he has been holding on to his core equity positions at the end of 2016 as revealed by Paulson & Co.’s recent 13F filing. The fund reduced its stake in most of its major holdings during the fourth quarter, which contributed to the value of its US long equity portfolio sliding by $1.29 billion to $7.93 billion at the end of December. However, the fund’s top-five stock picks remained the same over the quarter. In aggregate, these top-five holdings alone  accounted for over 43% of the fund’s equity portfolio value, as of December 31. In the rest of this post, we will take a look at the five major changes Paulson & Co. made in its portfolio during the fourth quarter.

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International Seaways Inc (NYSE:INSW)

– Shares Held By Paulson & Co. (as of December 31): 3.68 Million

– Value of The Holding (as of December 31): $51.68 Million

International Seaways Inc (NYSE:INSW) was a new entrant in Paulson & Co.’s equity portfolio during the fourth quarter. The company became a separate publicly-traded entity in November last year after it was spun off from Overseas Shipholding Group (NYSE:OSG). Since then, International Seaways Inc (NYSE:INSW)’s stock has appreciated significantly and is currently trading up by 31.77% year-to-date. Despite this rally, analysts who have started tracking the stock argue that it’s trading at a considerable discount to its peers. International Seaways is currently trading at a EV/EBITDA multiple of around 4.4 times its fiscal 2016 numbers, while other tanker operating companies are trading at 5.5 to 7.5 multiples.

Harman International Industries Inc (NYSE:HAR)

– Shares Held By Paulson & Co. (as of December 31): 853,800

– Value of The Holding (as of December 31): $94.91 Million

Harman International Industries Inc (NYSE:HAR) also made its debut in Paulson & Co. equity portfolio during the fourth quarter, but isn’t expected to remain there for long. Late last year, tech major Samsung announced that it had agreed to acquire Harman International Industries Inc (NYSE:HAR) for $112 per share following which shares of the latter spiked. Currently, Harman’s stock is trading flat for 2017 and very close to the price that Samsung is offering, suggesting that most market participants believe that the deal will close soon. Since Harman’s stock trades at a forward P/E multiple of less than 15 currently, a lot of analysts think that Samsung is acquiring the company for a reasonable valuation.

Time Warner Inc (NYSE:TWX)

– Shares Held By Paulson & Co. (as of December 31): 2.85 Million

– Value of The Holding (as of December 31): $275.68 Million

Similarly to the previously-discussed two stocks, Time Warner Inc (NYSE:TWX) was also added to Paulson & Co.’s equity portfolio during the fourth quarter. Moreover, Like Harman International Industries, Time Warner Inc (NYSE:TWX) also became a takeover target in that quarter when AT&T Inc. (NYSE:T) announced that it would acquire Time Warner for $85.4 billion or $107.50 per share in a half-cash, half-stock deal. Although Time Warner’s stock has moved up by over 20% since that announcement, it is still trading at a considerable discount to the offer price. On February 15, Time Warner’s shareholders approved this merger. However, a lot of market participants are still skeptical about the deal going through due to the regulatory hurdles it faces. On February 9, a day after Time Warner reported better-than-expected fourth quarter numbers, analysts at Drexel Hamilton downgraded the stock to ‘Hold’ from ‘Buy’.

American International Group Inc (NYSE:AIG)

– Shares Held By Paulson & Co. (as of December 31): 4.81 Million

– Value of The Holding (as of December 31): $314.1 Million

Paulson & Co.’s large stake in American International Group Inc (NYSE:AIG) and Mr. Paulson’s crusade against the company’s top-management has been widely covered by the media for the past two years. As a result of that crusade, last year American International Group Inc (NYSE:AIG) agreed to make several changes which included appointing Mr. Paulson as one of directors on its Board and launching a massive capital return program. However, the fund became less bullish on the company while entering 2017. Paulson & Co.’s decision to reduce its stake in the insurance giant by 46% during the fourth quarter seems to be a great move in retrospect considering that American International Group Inc (NYSE:AIG)’s stock has tanked more than 10% since it reported its fourth quarter numbers on February 14. While analysts had expected AIG to report EPS of $1.18, it declared a a loss of $2.72 per share for the quarter. Nevertheless, along with the results the company also announced that it would increase the authorization of its repurchase program by $3.5 billion.

Extended Stay America Inc (NYSE:STAY)

– Shares Held By Paulson & Co. (as of December 31): 28.63 Million

– Value of The Holding (as of December 31): $455.41 Million

Though Paulson & Co. lowered its holding in Extended Stay America Inc (NYSE:STAY) by 24% during the fourth quarter, the company still managed to jump two spots in the fund’s portfolio during that period and was its sixth largest holding at the end of December. Extended Stay America Inc (NYSE:STAY)’s stock performed well during the fourth quarter and is again up 7.86% for 2017. On January 24, Barclays’ analysts Venu Krishna and his team released a list of 16 small- and mid-cap stocks with attractive risk/reward scenario under the Trump administration, which included Extended Stay America Inc (NYSE:STAY) as one of the picks. Earlier this month, while reiterating its ‘Buy’ rating on the stock Barclays PLC also set a $22 price target on it, suggesting a potential upside of 26.2%.

Disclosure: None