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Five Stocks John Paulson Is Betting On

Jonas Elmerraji|Stockpickr
Wednesday, 21 Sep 2011 | 4:04 PM ET

John Paulson has been getting a lot of attention recently — and not the good kind.

John Alfred Paulson, president of Paulson & Co., Inc.
TimSloan | AFP | Getty Images
John Alfred Paulson, president of Paulson & Co., Inc.

In 2011, the billionaire hedge fundmanager has been pointed out in the media for high-profile bets on companies that have delivered less-than-attractive returns in an already ugly market.

Bank of America and Sino-Forest are a couple of examples of Paulson & Co. holdings that have gotten plenty of attention lately.

So have the firm's return numbers.

One estimate puts losses in Paulson & Co.'s largest hedge fund at 34 percent year-to-date. That's a painful performance — especially when the Standard & Poor's 500 is only down 4.4 percent on the year.

Still, it begs the question: Is Paulson wrong, or is he just early? If history is any indication, market commentators may want to wait a bit before mocking Paulson's stock-picking skills.

Last year, according to data compiled by Bloomberg, Paulson's flagship fund was down around 11 percent between January and August, only to rally to a profit by the end of 2011.

Now stocks aren't just cheap on a fundamental basis — they're also starting to show some technical strength. I think that timing warrants taking a more analytical look at what Paulson's still bullish on right now.

News Corp.

Like Paulson, News Corp. is a firm that's been getting a lot of negative attention lately.

The $44 billion media conglomerate has seen its reputation get slammed as news of the firm's phone-hacking scandal was disseminated.

But even if the firm's reputation has been beaten down, its share price hasn't been. News Corp.'s stock is up 15.5 percent on the year. Paulson & Co. purchased a $184 million stake in News Corp. this past quarter.

News Corp. owns businesses ranging from cable networks to film studios and everything in between. The firm's exposure to so many different types of outlets has been a nice diversifying factor, particularly in recent years when advertising-driven media weakened, and had subscription-based revenue streams to reduce declines.

News Corp. is also diversified from a geographic standpoint. Approximately half of sales come from outside the U.S., an attractive attribute for investors who have undue domestic exposure in their portfolios. Inroads into Asia are a particularly compelling growth prospect for News Corp.

As consumers in other markets increase their appetites for media content, News Corp. should be primed to fulfill that demand. The firm carries approximately $17.6 billion in cash and investments on its balance sheet, more than offsetting $15.9 billion in long-term debt.

News Corp. isn't a screeching bargain right now, but it does have considerable growth potential.

Mosaic

Fertilizer firm Mosaic is one of the world's largest producers of phosphate and potash nutrients used for crops and animal feeds. The firm's mines contribute approximately 12 percent of the global production of both potash and phosphate.

John Paulson's firm purchased a $152 million stake in the firm this past quarter.

Rising commodity prices are one of the biggest catalysts for Mosaic's growth right now. The prices for the fertilizers that Mosaic mines have been rallying hard in the last few years, and price increases in soft commodities mean that farmers are able to stomach those rising fertilizer costs.

Rising sales prices with fixed costs mean Mosaic is seeing attractive margin expansion right now; in the latest quarter, the firm's net margins sat right around 23 percent.

Mosaic's specialized fertilizer products fetch higher prices than their competition, resulting in a higher economic moat — a crucial differentiator for a firm that deals with commoditized inputs.

The firm's financials are equally attractive right now. Mosaic sports a net cash position and substantial free cash generation abilities. The fairly recent addition of a dividend could up shareholder returns in 2011, but the firm can shoulder a bigger payout than it currently offers.

NYSE Euronext

All has been fairly quiet lately with respect to the merger deal between Wall Street's iconic NYSE Euronext and Germany's Deutsche Boerse .

The deal has been criticized for its claim of being a "merger of equals" rather than a takeover of the Big Board by the Frankfurt-based exchange, but ultimately it's still going forward. That's been unfortunate for NYSE Euronext shareholders, who've seen the value of their investment slide more than 23 percent as prices became tied to those of their new German acquirer.

Paulson & Co. picked up a $103 million position in NYSE Euronext last quarter, but I suspect the purchase was for his firm's Paulson Partners Enhanced Fund as a merger arbitrage opportunity.

While the spread between Deutsche Boerse's offer price and NYSE Euronext's shares is minimal now, it went out of synch back in May, then as high as $8.56 back in early August — two opportune times to take advantage of the mispricing. That's the likeliest strategy for Paulson's buy.

Barring another big discount in either the merger deal, a buy in NYSE becomes a bet on the merger itself. The new NYSE will be more efficient with added clearing and settlement capabilities as well as a new market for its nascent futures business.

Still, outsized exposure to the euro is less than attractive right now.

Agnico-Eagle Mines

John Paulson has been bullish on gold for a while.

His firm has had considerable positions in a number of gold plays (including a $4.6 billion stake in the SPDR Gold Trust ETF that makes up 15.8 percent of the firm's portfolio), and he's increasing that bet with a $44 million position in Agnico-Eagle Mines .

Agnico-Eagle is a gold miner with an estimated 21.3 million ounces in reserves. The firm flipped the switch on five new mines after 2008, bringing significant output capacity to market just as gold prices began a prodigious rally.

Now the company is capable of churning approximately a million ounces of gold out of its mines each year. That's contributed to profit margins of almost 20 percent right now.

While real gold bugs stress the importance of physical holdings over mere "exposure" to gold, they should really consider investing in the miners right now.

During the selloff of the last few months, gold miners weren't spared from the slaughter even as gold prices continued to climb. That's left the spread between miners and the gold they produce even larger than before, an impressive bargain opportunity.

Once those higher prices flow down to income statements, Wall Street's going to have to recognize that value.

Southern Union

Southern Union is an integrated natural gas firm that has its hand in everything from gathering gas to processing, storing and transporting it through its massive pipeline network.

That's an attractive bet right now, given investors' overwhelming opinion that natural gas is due for an upward correction — at some point.

Regardless of the timeline in the nat gas recovery, Southern Union is doing just fine. The company generates significant cash through its operations, a necessary attribute given the capital-intense nature of the business.

Even with debt service paid for, Southern Union ekes out nearly double-digit net margins. That's made the firm an acquisition target.

Energy TransferEquity

Energy Transfer Equity's $8.9 billion buyout offer was approved by both boards, and it's likely the reason for Paulson & Co.'s decision to take a $182 million stake in Southern Union this past quarter.

Again, this is a merger arbitrage name, one that was trading with a massive gross spread of $7.37 back in June. Today, that spread has diminished significantly.

While the merger arbitrage opportunity may have fizzled, Energy Transfer Equity is a solid name that generates stellar dividend income. I'd recommend that investors seeking exposure to the combined nat gas firm just buy the acquirer.

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Disclosures:

Stockpickr contributor Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report. At the time of publication, he had no positions in stocks mentioned.

TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Disclaimer

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S&P 500
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AEM
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BAC
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DB1
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ETE
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GLD
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MOS
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FOXA
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LDKSY
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FMD
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NYX
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SINO-FOREST
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