7 Bold Buys By John Paulson

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 |  Includes: CAG, COF, MOS, NWSA, SUG, TMO, WFC
by: Efsinvestment

John Paulson is one of the prominent hedge fund managers on the Street. His company, Paulson & Co., has almost $30 billion of assets under management. His fund management style is distinctive and extremely complex. As a former investment banker, Paulson uses both merger arbitrage opportunities as well as credit default swap options. The billionaire businessman earned $3.7 billion dollars in 2008 by shorting the mortgage back securities. He made $4.9 billion in 2010 from his portfolio.

As of the Q2 2011, Paulson & Co. had a financial-heavy portfolio of equities. Paulson favors financial stocks, followed by commodity and energy investments. He also holds a significant amount of gold in his portfolio. Financial stocks constitute 27.65% of the holdings, followed by SPDR Gold (NYSEARCA:GLD) (21.90%), basic materials (17.84%), and energy companies (9.20%). Service companies constitute 8.49% of the portfolio.

According to Edgar Online, Paulson increased its ownership of 18 stocks, while opening 11 new positions in the last quarter. I have examined the boldest 7 stock buys from a fundamental perspective, adding my O-Metrix Grading System where possible:

Company

Ticker

Shares Held

% Change

% of TSO*

O-Metrix Score

Wells Fargo

WFC

33.6 million

63.90%

0.64%

8.90

Life Tech.

LIFE

7.52 million

NEW!!!

4.17%

3.51

Ralcorp

RAH

3.69 million

823%

6.70%

2.71

Southern Union

SUG

4.53 million

NEW!!!

3.63%

1.56

News Corp

NWSA

10.4 million

NEW!!!

0.57%

6.41

Mosaic

MOS

2.25 million

NEW!!!

0.82%

4.13

Capital One

COF

21.1 million

17.22%

4.59%

7.97

Click to enlarge

*TSO: Total Share Ownership by Paulson & Co. Data obtained from Finviz and Morningstar and is current as of Aug.25.

Wells Fargo, a Warren Buffett favorite, lost 12.97% in a month and 10.22% in the last quarter. The year-to-date return is -19.30%. Paulson owns 33.6 million shares and increased his holdings by 63.90% in the last quarter. Total share ownership stands at 0.64%.

The stock is trading with a low P/E ratio of 9.60, and a forward P/E ratio of 7.16. It pays a yield of 1.94%. While the debt/equity ratio of 1.44 is a red flag, analysts have a mean price target of $35, implying 40% upside potential. Based on an annualized EPS growth estimate of 12.91%, Wells Fargo has an O-Metrix score of 8.90.

Life Technologies lost 20.97% in a month and 26.68% in the last quarter. The year-to-date return is -31.06%. Paulson initiated a new purchase in the second quarter and owns 7.52 million shares. Total share ownership stands at 4.7%. Life Technologies operates as a life sciences company in the biotechnology sector.

It is trading with a trailing P/E ratio of 19.72 and a forward P/E ratio of 9.18. Target price is $56.17, implying 47% upside potential. Based on an annualized EPS growth estimate of 10.13%, Life Technologies has an O-Metrix score of 3.51.

Ralcorp Holdings lost 3.81% in a month and 4.58% in the last quarter. Thanks to ConAgra Foods’ (NYSE:CAG) rejected takeover bids, the stock returned 28.44% since January. Paulson owns 3.69 million shares and increased his holdings by 823% in the last quarter.

Total share ownership stands at 6.70%. The stock is trading with a trailing P/E ratio of 20.62 and a forward P/E ratio of 14.22. Based on annualized EPS growth estimate of 9.43%, Ralcorp has an O-Metrix score of 2.71.

Southern Union is a takeover target. It received a proposal from Williams Companies (NYSE:WMB) and Energy Transfer Equity (NYSE:ETE). Energy Transfer Equity’s $4.2 billion bid was outbid by Williams Companies’ $4.9 billion cash offer. Paulson initiated a new purchase of 4.53 million shares in the second quarter.

Total share ownership stands at 3.63%. The stock is trading with a trailing P/E ratio of 22.46 and a forward P/E ratio of 19.87. It pays a yield of 1.45%. Based on a 5-year annualized EPS growth rate of 5.17%, Southern Union has an O-Metrix score of 1.56.

News Corporation is a highly volatile stock. 52-week trading range is $11.79 - $18.25. Paulson initiated a new purchase of 10.4 million stocks in the second quarter and owns 0.57% of the company. News Corporation is trading with a low trailing P/E ratio of 14.49 and a forward P/E ratio of 10.01. Dividend yield is 1.15%. Based on an annualized EPS growth estimate of 14.54%, it has an O-Metrix score of 6.41.

Mosaic, a Jim Cramer favorite, is also favored by John Paulson. Paulson initiated a new purchase of 2.25 million shares and owns 0.82% of the company. Mosaic is pretty popular among institutions. The institutions own 71% of the company. Top 10 institutions significantly increased their holdings in the last quarter. While the company is doing well, the stock has been falling off the cliff since mid-March.

The year-to-date performance is -12.33%. Mosaic is a highly profitable stock with a gross margin of 31.41% and a net margin of 25.34%. It has no debt issues. Its current ratio is 3.47 and debt/equity ratio is 0.07. Analysts estimate 9% EPS growth for the next 5 years. Based on these estimates, Mosaic has an O-Metrix score of 4.13.

Capital One lost 8.77% in a month and 17.86% in the last quarter. Nevertheless, the year-to-date return of 2.24% is still in the positive territory. Paulson owns 21.1 million shares and increased his holdings by 17.22% in the last quarter. Capital One is one of the cheapest stocks in the market.

While the debt/equity ratio of 1.32 is a red flag, the stock is trading with a low P/B value of 0.69. Trailing P/E ratio is 5.7, whereas the forward P/E is 7.32. It pays a yield of 0.46%. Based on annualized EPS growth estimate of 9.92%, Capital One has an O-Metrix score of 7.97.

Find more information on O-Metrix Grading System here.

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