Billionaire John Paulson's Long-Term Stock Picks

Includes: BAC, HIG, MGM, MYL, NG
by: Insider Monkey

By Matt Doiron

We maintain a database of quarterly 13F filings from hedge funds and other notable investors to help us in developing investing strategies (we have found, for example, that the most popular small-cap stocks among hedge funds earn an average excess return of 18 percentage points per year). This database can also be used to track what individual hedge funds such as billionaire John Paulson's Paulson & Co. have owned over time. Imitating these picks isn't necessarily a good idea, but they might serve as initial ideas for further research or lead to more investigation of an industry. Here are five stocks from Paulson's portfolio as of the beginning of this year, which he had also owned at the end of 2010 (or see the full list of Paulson's stock picks):

Mylan (NASDAQ:MYL), a $12 billion market cap manufacturer of both generic and branded pharmaceuticals, was one of Paulson's 10 largest holdings by market value at the beginning of January. The stock is up 38% in the last year. The first quarter of 2013 was a weak one for Mylan, with earnings declining by 17% versus a year earlier, but Wall Street analysts believe that the company will recover and as a result earnings per share forecasts for 2014 represent significant improvement on current conditions. As a result, the forward earnings multiple is 9, which would make for value levels if Mylan does hit its targets.

Paulson and his team reported owning close to 38 million shares of MGM (NYSE:MGM) at the end of December. MGM is unprofitable on a trailing basis, and is expected to remain in the red both this year and in 2014 (though its losses are supposed to shrink in that year). Revenue has been growing, but not at a particularly rabid rate. The stock is highly sensitive to movements in broader market indices, as shown by a beta of 2.5. We'd note that in the current environment casino stocks with positive profits are seeing high earnings multiples, reflecting general bullishness on the industry.

The fund slightly trimmed its stake in Hartford Financial Services (NYSE:HIG), though it did maintain ownership of over 18 million shares in the insurer. The long-term holding is another high beta stock, though there is a value case to be made for Hartford: the stock is trading at only 8 times forward earnings estimates, and at 0.6 times the book value of its equity. Recent financial numbers don't look great but the stock is cheap enough that we think it is worth further research - certainly Hartford's internal estimates of the value of its assets would have to be quite far off for the stock price to fall by much.

According to the most recent 13F, Paulson had nearly 36 million shares of Novagold (NYSEMKT:NG) in his portfolio. The billionaire has been very excited about gold miners (and gold itself), but Novagold has fallen by over 50% in the last year as the company has reported net losses for the past several quarters. As with MGM, analysts are expecting EPS to be negative in both this fiscal year and in the next one as well. Of course, investing in Novagold probably only makes sense if an investor is neutral to positive on gold prices and certainly anyone interested could consider other gold miners as well.

Our database shows Paulson disclosing ownership of over 27 million shares of Bank of America (NYSE:BAC). There's a considerable discount to book value here, with Bank of America's P/B ratio being 0.6. Business also improved last quarter compared with the first quarter of 2012, with double-digit growth rates on both top and bottom lines. However, earnings are growing from a low base and the forward P/E of 10 is actually not that high for a large bank in this environment. Bank of America had made our list of the most popular financial stocks among hedge funds in the fourth quarter of 2012 (find more financial stocks hedge funds love).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.