by Lucas Scholhamer
John Paulson founded his hedge fund, Paulson & Co., with little more than $2 million in 1994. Nearly 17 years later, after making billions in 2008 from correctly predicting the downfall of subprime mortgages, the company’s assets under management total approximately $30 billion. Paulson himself has earned his spot as one of the richest men in the world, with a net worth upwards of $16 billion. We took a look at some of his newest buys:
Hewlett Packard (HPQ): The tech giant, founded in 1939, is now one of the world’s largest information technology companies. Paulson currently holds 25,000,000 shares, equivalent to about 3% of his portfolio. With a market cap of $73.2 billion, HP stock fell 3.13% to $35.29 at the time of writing, continuing to decline off its YTD high of $49.39 back in February. It also offers a P/E ratio of just 8.7 along with a dividend yield of 1.32%.
I think that John Paulson made a good move in his purchase of HP stock. In data centers nationwide, HP and Dell (DELL) servers have become the accepted industry standards, and both have fiercely loyal followings. HP is making waves with its move into the switch market, giving switch-giant Cisco Systems (CSCO) a run for its money. While Cisco generally sets the direction and standard of the industry, its extreme size makes it slow to adapt to new threats. As such, HP estimates that it has gained about 2.3% of switch revenue share in 2009 and 2010 against competitors like Cisco and Juniper Networks (JNPR), with revenue for its storage and networking division up 22% last quarter.
Aside from hardware, HP’s IT consulting services have been especially effective for the company. For years, consultants have developed highly specific setups for individual clients that are more painful and expensive to replace than they are to simply upgrade with even more HP gear—meaning repeat customers abound. And with shares priced near the 52-week low, this might be a valuable opportunity to pick up HPQ stock.
J.C. Penney (JCP): Since 1902, J.C. Penney has been one of America’s premier retailers, now operating over 1,100 department stores across the nation. Shares depreciated 3.49% on the day to $31.81 at the time of writing. JCP stock also comes with a sturdy 2.43% dividend yield. The retailer has struggled recently, with share values dropping over $3.00 since management cut EPS estimates for Q2 from over 20 cents to just 6 cents. This decrease was driven by an unexpectedly high number of promotions needed to compensate for low consumer demand on the quarter.
But not all of the news is bad for JCP. Last month, the company announced the hiring of former Apple (AAPL) executive Ron Johnson as the new CEO for J.C. Penney. He will take over in November. During his time at Apple, Johnson revolutionized the concept of a retail store, seamlessly integrating technology into the traditional shopping experience. Investors are hoping he can inject new life into this aging department store, and we think that customers will appreciate the changes in the layout and check out lines of JCP stores, along with any new handheld technology that Johnson introduces.
JCP stock climbed a startling 17% (from $30.11 to $35.37) the day that Johnson’s hiring was announced, and JCP shares maintained their value until the recent fall. The current slump comes in a month where the nation saw sales for major retail chains increase 6.5% year over year. J.C. Penney itself saw its same-store sales rise 2% in June. But the promotions needed to draw in customers combined with the fading newness of the Ron Johnson-craze has led to lower margins, slower-than-expected growth and ultimately, falling share prices. But if the momentum in the retail industry can carry through the coming months and Ron Johnson can indeed deliver, J.C. Penney could make a comeback in the near future.
Lorillard Inc. (LO): Founded in 1760, Lorillard is the third largest manufacturer of cigarettes in the United States, with brands including Newport, Kent, and Maverick, among many others. Shares traded down 0.54% to $109.53 at the time of writing after a roller-coaster-like June, where prices dropped nearly 10% and then recovered as a potential FDA regulation change fell through. LO carries a P/E ratio of about 15.7, just above the industry average, and offers a solid 4.74% dividend yield.
According to Lorillard’s most recent earnings report, Q1 earnings per diluted share increased 14% year over year to $1.71. Additionally, LO was the first of the major U.S. cigarette makers to raise prices earlier this month, a change aiming to exploit the company’s strong pricing power and significantly increase revenues. Finally, Lorillard approved a $400 million expansion to its existing $1 billion share buyback program, which should please shareholders.
But while the numbers look good for Lorillard, I believe that Altria Group Inc. (MO) is a better bet. First, with shares priced at $26.90, it is considerably cheaper than Lorillard. Next, its extremely high 5.7% dividend yield is very attractive. Finally, Altria Group has a more diverse portfolio. Along with its premium tobacco brands, which include Marlboro, Copenhagen, and Skoal, MO also owns Ste. Michelle Wine Estates, a fast-growing premium wine producer, and has a large stake in SABMiller, the world’s second largest brewer. I think Altria’s substantial interest in alcohol provides a level of safety that cannot be matched by Lorillard, whose entire portfolio is subject to increasingly strict regulations by the FDA, especially for its big-earner menthol products. Additionally, Altria has outperformed the S&P 500 (SPY) every year since 2010 and has increased its dividend in 42 of the last 44 years.
Transocean Ltd. (RIG): Transocean Ltd. is a Swiss-owned offshore drilling company and, more familiarly, owner of the notorious deepwater rig that sparked the gulf oil disaster last year. Shares depreciated 0.84% to $59.96 at the time of writing. RIG stock carries a dividend yield of 1.5% and an unimpressive 46.1 P/E ratio. The company has a market cap of $19.2 billion, and John Paulson currently holds 24.5 million shares of RIG in his portfolio.
RIG shares have been falling since late February, when it hit its 52-week high of $85.98. But while the current downtrend looks discouraging, I believe it could be a valuable time to buy into a company waiting to rebound. Transocean has the largest fleet and the most experience in the industry, not to mention a $25 billion backlog that should keep the company busy for at least the next year and a half. It is trading below its 50- and 100-day moving averages, and price target estimates are averaging in the low to mid $70 range. Additionally, it could benefit from an increasing demand for offshore drilling equipment due to oil finds by ExxonMobil (XOM) and Noble Energy (NBL) in the Gulf of Mexico, as well as huge reserves discovered off the coast of Brazil.
However, it is necessary to mention the negatives: a current lawsuit with BP over the Deepwater Horizon disaster and a Transocean rig currently stabilizing after taking on water off the coast of Ghana. But a lawsuit the magnitude of the BP/Transocean case is not likely to be resolved anytime soon, or at least until Transocean is on more stable footing, and the successful resolution of the Ghana incident without injuries or spilled oil may be but a minor setback. I am still optimistic that Transocean’s current troubles present a valuable opportunity to pick up shares of this industry leader.
Alpha Natural Resources Inc. (ANR): Alpha Natural Resources is one of America’s top metallurgical and thermal coal producers, and Paulson currently holds 12,000,000 shares. Shares appreciated .28% to $43.37 at the time of writing, although the price has dropped nearly 28% so far this year. ANR stock has a P/E ratio of 39.8, well above the industry average.
The demand for coal has recently been driven sky-high by a global need for steel: flooding in Australia has significantly stymied steel production, China’s demand for the metal has reached between 45 and 50 million tons for the year, Japan continues to rebuild its damaged infrastructure, and its automobile factories are beginning to resume work at full capacity. As a result, ANR shipped a record 3.6 million tons of metallurgical coal in Q1, a 37% year-over-year increase, and revenue increased 23% since Q1 last year. Additionally, by acquiring Massey Energy (MEE) earlier this year, ANR added to its already-impressive reserves and rounded out its portfolio to become the world’s third-largest metallurgic coal producer. With average price target estimates averaging around $68.50, a potential 58% upside, ANR’s current slump could be a good chance for value investors to pick up shares at a discount.
We also think that Cloud Peak Energy (CLD) represents an interesting buy. The company is the third largest producer of coal in the U.S., and now looks like a good buy as a potential takeover target. Based on analyst price target estimates, CLD has an upside potential of 25% on its current $21.20 price. It is the last pure-play company focusing on the Powder River Basin coal in areas of Montana and Wyoming. This play has been viewed as less valuable due to its distance from metropolitan areas and major commerce centers, but the proper utilization of an expanding railroad infrastructure or finding another method of direct transportation to the west coast could send the stock soaring. Potential buyers of CLD could include Peabody Coal (BTU) or Arch Coal (ACI).
Barrick Gold Corporation (ABX): Barrick is the largest producer of gold in the world, operating 26 mines across the globe. Shares appreciated 2.53% to $47.04 at the time of writing, with a P/E ratio of 13.8 and a 1.04% dividend yield. Lately, mining stocks have been outperformed by gold itself, but with gold soaring above $1,568 per ounce and growing concern about weakness of the dollar and the European debt crisis, Barrick should have as much work as ever. Typically, gold mining stocks tend to mimic the performance of gold itself, and some optimistic analysts see the current underperformance of mining stocks as a valuable buying opportunity.
There are several reasons to be bullish on this particular mining stock. First, it reportedly costs Barrick only $437 to produce an ounce of gold, so given gold’s price over $1500/ounce, the company can turn a considerable profit at a high margin. Barrick currently produces well over 7 million ounces per year with plans to up production to the 9 million ounce range in the next several years, and with reserves holding an estimated 140 million ounces, this rate of production can continue for an extended amount of time. Finally, ABX announced that it will buy Equinox Minerals, Ltd. (OTC:EQNMF), a move that should help diversify the company’s portfolio with a significant stake in copper, another metal in high demand (albeit for its practical uses, unlike gold.)
However, it is important to remember that gold miners, like all companies, are not immune to the weakening of the dollar. Despite the fact that their success is tied to the success of gold, these companies must overcome rising operating costs in order to achieve profitability and high margins. I prefer the SPDR Gold Shares ETF (GLD), which is pegged to the price of gold, to sidestep this obstacle. However, some argue that ETFs don’t necessarily have the same expandability as miners, who have a supply of potentially unrealized physical assets in the ground. John Paulson has a significant stake in both, with 31.5 million shares of GLD making up a stammering 12.5% of his portfolio and 900,000 shares of ABX.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.