Seeking Alpha
Profile| Send Message|
( followers)  

John Paulson founded his investment company, Paulson & Co, in 1994 after a career that included time at the Boston Consulting Group and Bear Stearns (BSC). Paulson & Co manage approximately $29 billion. I took a look at some of his latest buys to see if we agree with him:

Alpha Natural Resources Inc. (NYSE:ANR): Alpha Natural Resources produces coal principally from its properties in the Appalachian region. It operates over 60 mines, and its customers include utility companies and steel manufacturers. Paulson bought a stake of 12 million shares in the first quarter of this year, which is approximately 2.08% of his portfolio.

The shares trade at $40.09 at the time of writing, toward the lower end of their 52 week trading range of $33.24 to $68.05. At today’s share price, the market capitalization of Alpha Natural Resources is $4.94 billion. With earnings per share last year of $1.10 the shares trade on a price earnings ratio of 37.32. The company paid no dividend last year.

Alpha Natural Resources lags behind its competitors in almost every respect. Its operating margins of 5.30% are miniscule in comparison Consol Energy’s (NYSE:CNX) 16.41%, and the 19.81% seen at Peabody Energy Corp (NYSE:BTU). The price earnings ratio is more than double the industry average of 14.94. If the economy picks up, then its earnings could be pushed toward analysts estimates of $6.12 per share in 2012. However, any slowing of the economy would be bad news for Alpha Natural Resources, which doesn’t have the cushion in its margins to absorb any higher costs of production without increasing its sales. I am not surprised that the stock has moved toward its low of the last 12 months since peaking in January. I think Cloud Peak Energy (NYSE:CLD) is a better bet in the coal space.

Hewlett Packard & Company (NYSE:HPQ): Hewlett Packard is a market leader in the hardware and software provision industry. Paulson bought a stake of 25 million shares in the first quarter of this year, which is approximately 2.99% of his portfolio.

The shares trade at $34.35 at the time of writing, only a shade above the low point of its 52 week trading range of $33.95 to $49.39. At today’s share price, the market capitalization of the company is $71.25billion. With earnings per share last year of $4.07 the shares trade on a price earnings ratio of 8.44. The company paid a dividend of $0.48 last year (a yield of 1.40%).

Whilst Hewlett Packard’s earnings are forecast to increase to $5.37 per share in 2012, this growth lags behind that of EMC (NYSE:EMC) which is forecast to grow its earnings by 193% during the same period. It also lacks the direct sales strength of Dell (NASDAQ:DELL) and the business scope of IBM (NYSE:IBM). In this market where touch screen technology is in vogue, its product is being seriously outgunned by Apple’s (NASDAQ:AAPL) iPad: so much so that Hewlett Packard has just announced a cut of $50 from its TouchPad product. There are better companies in this space than Hewlett Packard.

Lorillard Inc (NYSE:LO): Lorillard sells cigarette brands under the names Kent, Maverick, and Old Gold. Paulson bought a stake of 580,000 shares in the first quarter of this year, which represents approximately 0.16% of his portfolio.

The shares trade at $104.59 at the time of writing, with a 52 week trading range of $72.40 to $116.90. At today’s share price, the market capitalization of Lorillard is $14.54 billion. With earnings per share last year of $7.31 the shares trade on a price earnings ratio of 14.31. The company paid a dividend of $5.20 last year, yielding 5%.

Cigarettes are one of those products that benefit from a high level of customer loyalty. Customers tend not to change brands. It is also a product that does well in times of economic uncertainty (along with basic food, and alcohol).

Lorillard has a high dividend paying policy, and its estimated increasing earnings per share of $7.72 in the coming year, and $8.52 the year after, should allow it to increase the absolute dividend significantly. I think this is a good purchase in a stock that should give defensive qualities should the economy weaken, and a high, steady dividend flow. Altria (NYSE:MO), Philip Morris International (NYSE:PM) and Reynolds (NYSE:RAI) are equally good bets in this space.

Baxter International Inc (NYSE:BAX): Baxter International markets a range of medical products to hospitals, clinicians and researchers. Paulson added to his existing stake in the first quarter of 2011, and now holds 8 million shares, which is approximately 0.47% of his portfolio.

The shares trade at $55.92 at the time of writing, in the middle of their 52 week trading range of $42.47 to $62.50. At today’s share price, the market capitalization of the company is $31.90 billion. With earnings per share last year of $3.67 the shares trade on a PE ratio of 15.25. The company paid a dividend of $1.24 last year (yield of 2.20%).

Baxter International is a beneficiary of the desire for better healthcare around the world. However, with debt concerns and the impending cuts in the Medicare program on the cards, it has to be questioned whether its estimated earnings of $4.30 this year and $4.71 next year will be achieved. With the backdrop of these cuts, the sector is not as defensive as perhaps it once was, and any undershoot of these numbers could harm the shares greatly.

Family Dollar Stores Inc. (NYSE:FDO): FDO runs around 7,000 stores across 44 states, aiming its products at low and middle income earners. The company sells consumables from food to clothing. Paulson bought a stake of 3,455,000 shares in the first quarter of this year, which is approximately 0.52% of his portfolio.

The shares trade at $51.66 at the time of writing, with a 52 week trading range of $41.17 to $56.92. At today’s share price, the market capitalization of Family Dollar Stores is $6.28 billion. With earnings per share last year of $3.00 the shares trade on a price earnings ratio of 17.24. The company was able to pay a dividend of $0.72 last year, and yield 1.40%.

Management at Family Dollar Stores has bought the company financials into line with its larger and better-known competitors, Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). An operating margin of 7.42%, and a keen eye on costs mean that it is likely to increase its earnings per share to $3.57 over the next twenty-four months. Compare this to the growth expected at Wal-Mart and Target, both between 7% and 8%, and the higher price earnings ratio is warranted. With unemployment showing no sign of falling, and spending power being squeezed over the coming years, this looks a good buy.

AngloGold Ashanti Ltd Inc (NYSE:AU): AU has gold mining operations across Africa, and in Australia, as well as in the Americas. At the end of 2010, the company had proved reserves of 71.2 million ounces of gold. Paulson bought a stake of 3 million shares in the first quarter of this year, which is approximately 0.47% of his portfolio.

The shares trade at $43.29 at the time of writing, toward the lower end of their 52 week trading range of $39.70 to $52.86. At today’s share price, the market capitalization of the company is $16.69 billion. With earnings per share last year of $0.45 the shares trade on a PE ratio of 95.56. The company paid a dividend of $0.23 last year.

AngloGold is due to announce the full effects of the heavy rains in Australia earlier this year, where it owns Sunrise Dam and production is expected to be down between 75,000 and 280,000 ounces. This uncertainty has been a contributing factor in the shares recent weakness in the face of increasing gold prices. However, this said, the sector could be in for further repricing.

This week, Arcelor (NYSE:MT) bid for Australia’s coal miner Macarthur (OTC:MACDY), and this could be a precursor to deals amongst precious metal miners as the bigger companies seek to use cash built up during the commodity boom. Even without a potential feeding frenzy in the sector, the continuing debt problems in the United States and abroad should support the price of precious metals and give further price impetus to the AngloGold’s shares.

MetLife Equity Units Inc (NYSE:MLU): MLU sells group and individual insurance worldwide. It also provides investment and retirement products. Paulson bought a stake of 12 million shares in the first quarter of this year, which is approximately 2.08% of his portfolio.

The shares trade at $75.75 at the time of writing, toward the lower end of their 52 week trading range of $75.05 to $87.94. At today’s share price, the market capitalization of the company is $41.86billion. With earnings per share last year of $2.85 the shares trade on a PE ratio of 13.91. The company paid a dividend of $0.74 last year (yield of 1.80%).

Earnings per share at MetLife are expected to come in far stronger next year, at $5.08, as increasing annuity sales push profits. The company has recently announced annuity sales of $7.3billion in the second quarter of this year, up 48% from the same period last year. With earnings potential looking better than its rivals, American International Group (NYSE:AIG) where earnings per share are forecast to rise from $3.04 to $3.62, and Prudential (NYSE:PRU) where they are set to move from $5,79 to $6.67, Paulson’s 1st quarter purchase looks a solid move for the longer term.

Source: John Paulson's 7 Amazing Stocks Ideas