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John Paulson is the President and Portfolio Manager of Paulson & Co., which is ranked as the third largest hedge fund manager in the world with approximately $29 billion in investments. Paulson previously made billions by betting against the banks and shorting the market prior to the sub-prime meltdown. He is quite bullish on US stock markets and has recently said that equities risk premium is the most favorable of all asset classes now. This article will review 5 stocks recently purchased by Paulson in our search for stocks that have significant growth potential.

Life Technologies Corporation (NASDAQ:LIFE)

Life Technologies has a market cap of $6.91 billion with a price to earnings ratio of 19.71. Its 52 week trading range is $35.30 to $57.25. Its last trading price was $38.27. It reported second quarter earnings 2011 of $941.14 million, an increase from first quarter earnings of $895.89 million. Second quarter net income was $95.47 million, an increase from first quarter net income of $93.69 million. It has quarterly revenue growth of 4.10% and a return on equity of 8.16%. Life Technologies does not pay a dividend.

One of Life Technologies´ closest competitors is the Agilent Technologies Inc (NYSE:A). Agilent Technologies last traded at $31.96 and has a market cap of $11.10 billion. It has a price to earnings ratio of 11.15, quarterly revenue growth of 22.20% and a return on equity of 28.95%. This indicates that Agilent Technologies is performing better than One Life Technologies.

Paulson & Co holds 7,520,000 shares of One Life Technologies purchased at an average price of $53.00 per share. Based on the last trading price, they have made a return of -26.57%.

One Life Technologies second quarter 2011 balance sheet showed cash of $537.52 million, a substantial decrease from first quarter cash of $711.44 million. This decrease can be attributed to increased capital expenditure and investment spending. Spending on investments for the second quarter 2011 was only $49.49 million, compared to $1.28 million for the first quarter which still doesn´t account for the substantial drop in cash.

One Life Technologies quarterly revenue growth of 4.10% versus an industry average of 19.10%, and a return on equity of 8.16% versus an industry average of 8.9%, demonstrates that it is under performing the majority of its peers.

It has also seen a substantial decrease in its stock price since the end of second quarter 2011, dropping by 28.95%. It is difficult to identify a clear explanation for this substantial drop in price. However, it does indicate that the market has a negative view of the company. In conjunction with the substantial decrease in balance sheet cash and the poor performance indicators, I do not agree with Paulson’s purchase of the stock. I believe that it represents too much risk in comparison to better performing peers such as Agilent Technologies (A). I rate the stock as a sell.

Wells Fargo and Company (NYSE:WFC)

Wells Fargo and Company has a market cap of $127.93 billion with a price to earnings ratio of 9.38. For a 52 week period its trading range has been $22.58 to $34.25. Its last trading price was $24.23. It reported second quarter earnings for 2011 as $22.01 billion, a slight decrease from first quarter earnings of $22.15 billion. Second quarter net income was $3.95 billion, an increase from first quarter net income of $3.76 billion. The company has quarterly revenue growth of 6.60% and a return on equity of 11.42%. It pays a dividend with a yield of 1.90%.

One of Wells Fargo and Company´s closest competitors is JPMorgan Chase and Co (NYSE:JPM). JPMorgan Chase and Co last traded at $30.09 and has a market cap of $117.24 billion. It has a price to earnings ratio of 6.42, quarterly revenue growth of 14.90% and a return on equity of 11.43%. It pays a dividend with a yield of 3.30%. All of these performance indicators are on par with Wells Fargo and Company.

Paulson & Co holds 33,600,000 shares in Wells Fargo and Company, purchasing 13,100,000 shares in second quarter 2011, adding to an existing holding of 20,500,000 shares. The average price per share is $27.91. Based upon the last trade price, this represents a return of -13.19%.

Wells Fargo and Company’s cash position has improved, its second-quarter 2011 balance sheet showed $353.53 billion in cash, an increase from $335.82 billion in the first quarter. Its quarterly revenue growth rate of 6.60% is marginally lower than the industry average of 17.10% and its return on equity of 11.42%, is greater than the industry average of 6.70%. This indicates a well managed company performing ahead of many of its peers. This explains Paulson’s decision to purchase this stock. In addition, the recent drop in the stock price since the end of second quarter 2011 represents a buying opportunity. I rate Wells Fargo and Company as a buy.

News Corporation (NASDAQ:NWSA)

News Corporation has a market cap of $41.45 billion with a price to earnings ratio of 15.20. Its 52 week trading range has been $12.88 to $18.35. Its last trading price was $15.79. It reported second quarter 2011 earnings of $8.96 billion, an increase from first quarter earnings of $8.26 billion. Second quarter net income was $411 million, a decrease from first quarter net income of $911 million. News Corporation has quarterly revenue growth of 10.50% and a return on equity of 11.20%. It pays a dividend with a yield of 1.20%.

One of News Corporation’s closest competitors is Time Warner Inc (NYSE:TWX). Time Warner last traded at $30.61 and has a market cap of $31.98 billion. It has a price to earnings ratio of 13.21 and pays a dividend with a yield of 3.10% which is greater than News Corporation. Its quarterly revenue growth of 10.20% and return on equity of 7.94% are similar to News Corporation.

Paulson & Co bought 10,400,000 shares of News Corporation, in second quarter 2011 at an average price of $17.24. Based on the last trading price of $15.79, they have made a return of -8.41%.

News Corporation’s cash position has improved, the second-quarter balance sheet showed $12.68 billion in cash, an increase from $11.784 billion for the first quarter. It has a return on equity of 11.20% versus the industry average of 7.30%, indicating it is a well managed company. At this time based on News Corporation’s quarterly earnings growth, return on equity and increased balance sheet cash, I agree with Paulson’s decision to purchase this stock. I rate News Corporation as a buy.

Capital One Finance Corporation (NYSE:COF)

Capital One Finance Corporation has a market cap of $17.60 billion with a price to earnings ratio of 5.17. Its 52 week trading range has been $35.94 to $56.26. Its last trading price was $38.53.The company reported second quarter earnings 2011 of $4.56 billion, a decrease from first quarter earnings of $4.69 billion. Second quarter net income was $911 million, a decrease from first quarter earnings of $1.02 billion. The company is achieving quarterly revenue growth of 14.70% with a return on equity of 12.96%. It pays a dividend with a yield of 0.50%.

One of Capital One’s closest competitors is Morgan Stanley (NYSE:MS). Morgan Stanley last traded at $14.13, has a market cap of $27.82 billion with a price to earnings ratio of 53.32. It has quarterly revenue growth of 16.20%, a return on equity of 0.54% and pays a dividend with a yield of 1.50%. Based on these performance indicators Capital One is more effectively managed.

Paulson & Co holds 21,100,000 shares of Capital One, with 3,100,000 shares purchased in the second quarter adding to an existing holding of 18,000,000 shares. The total share holding was purchased at an overall price of $27.03 per share. Based on the last trade price, they have made a return of 42.55%.

Capital One Finance Corporation’s cash position has decreased, its second quarter balance sheet showed $46.12 billion in cash, a decrease from first quarter cash of $49.54 billion. With quarterly revenue growth of 14.70% versus an industry average of 16.30%, and a return on equity of 12.96% versus an industry average of 6.40%, it is not a standout performer in its industry.

The earnings potential of companies generating revenue from the finance sector remains poor in the short term, due to tight credit markets and the worsening economic climate. A recent Goldman Sachs Economic Whitepaper predicts US second quarter growth to be 1% and forecasts the unemployment rate to remain above 7% until at least 2013.

The recent 26.82% decrease in the stock price since July 1 2011, also indicates a loss of confidence by the market in the company. Accordingly, I don’t agree with Paulson’s decision to purchase the stock and rate Capital One Corporation as a hold.

Mosaic Company (NYSE:MOS)

Mosaic Company has a market cap of $22.98 billion with a price to earnings ratio of 8.41. For a 52 week period its trading range has been $44.86 to $89.24. Its last trading price was $51.45. The company reported second quarter earnings 2011 of $2.86 billion, an increase from first quarter earnings of $2.21 billion. Second quarter net income was $649.2 million, a decrease from first quarter net income of $542.1 million. It has quarterly revenue growth of 53.80%, a return on equity of 24.63% and pays a dividend with a yield of 0.30%

One of Mosaic’s closest competitors is Potash Corp of Saskatchewan Inc (NYSE:POT). Potash Corp last traded at $44.64 and has a market cap of $38.24 billion. It has a price to earnings ratio of 16.26 and pays a dividend with a yield of 0.60%. Potash Corp´s quarterly revenue growth of 63.90% and return on equity of 34.03%, are higher than Mosaic.

Paulson & Co purchased 2,250,000 shares of Mosaic in second quarter 2011 at an average price of $70.27 per share. Based on the last trade price they have made a return of -26.78%.

Mosaic’s cash position has improved in the second quarter 2011, the balance sheet showed $3.91 billion in cash, an increase from first quarter cash of $3.35 billion. It has quarterly revenue growth of 53.80% versus the industry average of 7.80% and a return on equity of 24.63% versus the industry average 29.80%. This indicates that it is well managed and has better growth prospects than most of its peers.

With the phosphate price increasing by 58% over the last year and the boom in demand for commodities driven by the growth of the Chinese economy, it indicates further opportunities for strong revenue growth. When combined with a weak dollar, that should make U.S. exports more competitive, and a stronger-than-expected manufacturing sector, it bodes well for commodities demand and producers like Mosaic.

This combined with the high quarterly growth rate and the strong cash position, indicate a company that is well positioned to capitalize on this demand. I agree with Paulson’s decision to purchase the stock and also believe that the recent drop in the stock price represents a buying opportunity. I rate Mosaic as a buy.

Source: Billionaire John Paulson's 5 Newest Portfolio Picks