Invest Like a Billionaire: John Paulson's 6 New Stock Picks

 |  Includes: BRK.A, HPQ, IP, RIG, WY, XL
by: Investment Underground

By Larry Gellar

Perhaps one of the more famous hedge fund managers, John Paulson, continues to be enormously successful with his hedge fund Paulson & Co. Let’s take a look at 6 of his latest buys.

Weyerhauser Co. (NYSE:WY) – This paper and pulp company has seen some incredible gains in the past 12 months. Whether that ride continues will be determined on July 29th when the company reports earnings. Although there hasn’t been much news driving this stock lately, some investors do not see their home building business doing well in the future. Others point out that the logging industry hasn’t been particularly strong lately. There are even some investors who are avoiding the stock because of increasing awareness of climate change. Another area of concern is the company’s cash flow – three of the last four quarters have had negative cash flow. On the other hand, the company is currently trading at a remarkably low P/E ratio of 6.35. The PEG and P/S aren’t quite as favorable though, 4.79 and 1.74 respectively. The P/S in combination with the P/E tells us that the company’s costs are already relatively low, which means that further improvement in the business will have to come from revenue. With the economy seemingly stuck in neutral, this type of growth cannot be assumed. Weyerhauser could be a good choice for investors looking for dividends – dividend yield is currently 2.7%. Finally, another important thing to understand about WY is that it is actually a REIT.

Lubrizol Corp. (LZ) – This stock skyrocketed once Berkshire Hathaway agreed to purchase the company in March. Investors are currently looking forward to July 26th’s earnings announcement. The company was able to beat last quarter’s earnings estimates by 18 cents. Some investors seem more interested in rival Eastman Kodak (EK) though because EK’s PEG and P/S are only 0.11 and 0.10, respectively. Eastman Kodak’s P/E is currently incalculable due to negative earnings, but note that Lubrizol’s P/E is competitive with other industry stalwarts such as Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD). Lubrizol’s P/E is currently 12.35, while Dow Chemical’s is 15.32 and DuPont’s is 19.31. As reported in this article, gross margin is strong, currently 32.42%. Other important points mentioned are that profit has been on the rise year-over-year and revenue has increased the past three quarters. The company has experienced negative cash flow in those same revenue-increasing quarters though, so that is certainly a concern. Regardless, some shareholders believe that Berkshire Hathaway’s buyout price is too low, especially after competitor NewMarket (NYSE:NEU) released strong earnings. One law firm has even launched an investigation of the proposed buyout. Regardless, it seems unlikely that the buyout offer will be increased. Also, some shareholders are disappointed that the company probably will not offer dividends once it comes under the control of Warren Buffett. Another important point to mention is that some of the company’s top executives will be stepping down once the buyout has been completed.

Hewlett-Packard Co. (NYSE:HPQ) – HP is down quite a bit from its February highs, and the stock is trading cheaper than ever. P/E ratio is only 9.11, compared to 10.22 for Dell (NASDAQ:DELL) and 15.01 for IBM. Also, PEG is 0.76 compared to 1.46 for Dell and 1.23 for IBM. As discussed in this article, the company's operating margin has improved the past few years to 11.7% but still lags behind IBM’s 20.19%. On the other hand, look for HP’s operating margin to improve as the company expands divisions other than the large, but not very profitable, personal computing division. HP’s financial statements are also worth taking a look at. Their balance sheet shows what is approximately a 1:2 cash-to-debt ratio. The company has also experienced negative cash flows in two of the past three quarters. Income has been strong in this same period though, which makes sense since those negative cash flows were mostly fueled by large investing/financing activities. In many ways, HP isn’t doing so poorly so much as some other tech companies are doing amazing. (Look no further than Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG)). Firms that compete more directly with HP such as Cisco (NASDAQ:CSCO), Dell, and Oracle (NASDAQ:ORCL) are also pretty strong at the moment. Furthermore, some shareholders question new CEO Leo Apotheker, who has had to lower earnings expectations twice already. Other shareholders find recent share buybacks interesting in light of the company’s mounting debt.

XL Group plc (NYSE:XL) – This insurance company has seen some impressive gains in the past 2 years. In fact, rumors of a possible takeover bid have been one factor propelling the stock upward. XL is certainly an interesting company, with a market cap that is a fraction of larger competitors like Allianz SE (OTCQX:AZSEY) and AIG. Additionally, the company offers decent dividends, with dividend yield currently at 2.10%. After The Travelers Companies (NYSE:TRV) announced disappointing earnings due to recent hailstorms and tornadoes, eyes have now turned to XL as the company is set to announce on August 2nd. A recent report by Zacks suggests that XL will also be affected negatively by these disasters. Zacks cites other issues in its downgrade of XL – mostly results of a poor economy and uncertain credit markets. News that XL is starting a railroad division in its insurance business also has investors excited. There are also a few interesting tidbits to be found from a look at XL’s financial statements. For instance, net income was actually negative for the quarter ending March 31st. Additionally, total cash flow for the past 12 months was barely positive. The company does have a solid amount of cash though, $18.87 per share. Other statistics of interest for XL include the P/E ratio, which is actually quite high – currently 30.88. This is over triple the P/E for companies like Allianz SE and AIG. Also note that XL’s PEG is also somewhat high at 2.07.

International Paper Co. (NYSE:IP) – A very similar company to Weyerhauser, International Paper has performed a bit better than its rival in the past 3 months. In fact, International Paper is now trading at a little over 11 times earnings. The company is currently involved in an acquisition for Temple Inland (NYSE:TIN) and shareholders are certainly hoping that IP will get a good deal. As discussed in this article, the acquisition is actually under investigation though. Essentially, TIN has instituted a Stockholder Rights Plan that would attempt to derail IP’s takeover bid. Recent disappointing earnings for TIN are making it more likely that TIN will simply have to accept IP’s bid, however. Some shareholders deride the acquisition on any terms and would prefer IP to pay some of its $8.54 billion debt. Note that the company’s debt-to-equity ratio is currently 112.71. Shareholders have also expressed desires for the company to fund its pension plan better. Other management decisions have been questioned such as a lenient credit policy that has resulted in some bad debt expense. IP’s Xpedx division seems particularly vulnerable to this. Xpedx has also come under fire for an inability to progress with the times, such as new digital equipment that makes the service obsolete. Even technology such as the iPad is believed to be having a negative impact on International Paper’s business. Also note that IP has been historically very sensitive to the markets overall, with a beta of 2.48. Without firm evidence that the economy is recovering, this stock should probably be avoided.

Transocean Ltd. (NYSE:RIG) – This offshore drilling contractor has been on a bit of a downward trend the past few months. Surprisingly, the company still trades at 34 times earnings and 2.96 times 5-year earnings growth. These are both significantly higher than Noble Corp. (NYSE:NE), seen by many as Transocean’s biggest rival. The main question facing the company (and the industry as a whole) is whether the company’s older equipment will still be profitable in the future. Regardless, the company is in a good position with its offshore specialty because so many onshore oil fields are drying up. One great article explaining Transocean’s valuation can be found here. Specifically, if Transocean’s current run rate keeps up in the coming months, valuation will benefit greatly. Transocean may also be a candidate for addition to the S&P 500 now that S&P’s rules would allow the Switzerland-based company to rejoin the index. While this may not translate to long-term increases in Transocean stock price, the stock should definitely benefit in the short-term when this happens. One recent headline that has hurt this company though is that one of Transocean’s semisubs, named the Marianas, has been damaged. However, the market may have overreacted to this as it remains to be seen how long the Marianas will actually be out of commission. The article linked above also cites improving utilization rates for Transocean compared to the industry overall.

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