John Paulson has had a tough year. His largest fund had lost 47% in the first nine months of the year. Then, surprising many investors, Paulson became so bearish on the market that he misses out on the October rally. But, don’t count him out just yet. Despite the less than stellar performance, less than 8% of his firm’s assets asked for redemptions this year. If that isn’t a vote of confidence after losing 47%, I don’t know what is. Here is my analysis of the the biggest yielders in his portfolio that, in my opinion, can recoup his losses. Investors can benefit by following his lead.
To get a better idea of what positions Paulson is favoring over the long term, I compiled a list of the top dividend yielding stocks in his portfolio. The dividend yield of these stocks ranges from 3.6% to 7.3%, while Paulson’s stake in them varies from $19.5M to $772.9M.
Transocean (RIG) does offshore drilling for oil and gas wells. Working on a contract-basis, RIG drills wells for some of the biggest oil and gas companies in the world. The company’s name rose to infamy in the wake of the Deepwater Horizon oil spill and the lawsuits that followed. In November, RIG was cleared from liability for the spill after BP Plc (BP) tried to take the company to court and sue (in a nut shell… read more here). However, there is still a case against RIG levied by the U.S. Government (Civil Action No. 4:11-cv-3638) that was filed October 12, 2011. Bloomberg summarized the case well, saying, “Transocean, owner of the rig that was drilling the Macondo well, was cited with four violations, including failing to maintain the rig’s blowout preventer, a stack of valves designed to shut an out-of-control well.” According to that article, RIG plans to appeal the charges. All this controversy surrounding the stock could put some investors off but Paulson isn’t fazed. He had over 3.7% of his portfolio in the company at the end of the third quarter, nearly 16.2 million shares valued at $772.9 million. RIG lost -3.10% from the end of September through December 1, bringing its year-to-date losses through December 1 to -34.19%. The losses are significant but the stock offers a 7.5% dividend yield and expectations for its future are strong. It is currently trading at $42.76 with a one-year target estimate of $63.37. The upside sounds good but RIG’s legal issues are a little too much for my liking. It could be a good short play if the verdict comes out in favor of RIG, but I’m not taking the chance. That said, for those who already own the stock, holding is in order.
Ashford Hospitality Trust (AHT) is a real estate investment trust (REIT) with holdings concentrated in the hospitality industry, focusing largely on big name brands like Marriott (MAR), Hilton (HLT), Hyatt and Starwood (HOT). Paulson brought his total number of shares in the company to 3 million in the fourth quarter 2009 and he hasn’t changed his holdings in the company since. That quarter the average price of AHT was $4.28. As of December 1, it trades for $8.05 and has a one-year target estimate of $9.30. In addition to being a solid earner, AHT also offers a sizable dividend if 40 cents or 5.10% of its current share price. This stock could go up, but I doubt it. It was trading at an average of $9.15 during the third quarter 2011, so very nearly its one-year target. The dividend may be nice, but for the money I would invest elsewhere. For those currently holding the stock, I recommend sell… as soon as it hits $9 a share.
Quad/Graphics (QUAD) is a company that provides print services to businesses looking for ways to reach their customers. It prints catalogues, magazines, direct mail and special interest publications. Paulson initiated a position in QUAD during the third quarter 2010. The average share price was $44.28. As of the end of the third quarter 2011, Paulson still held the same number of shares. QUAD closed trading on November 30 at $16.02 a share. It has a one-year target estimate of $18.67. The upside may not be that great, but QUAD offers a sizable dividend as well – 80 cents (that’s 5.00% dividend yield). QUAD has -1.70% quarterly revenue growth, compared to 10% for competitor Cenveo (CVO). In other words, the price is too low on QUAD to sell and the prospects are not strong enough to buy.
Whirlpool (WHR) makes and markets home appliances worldwide. It sells its wares under such brand names as Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana and Roper. Paulson sold out of WHR in the second quarter of 2006. He initiated a new position in WHR during the fourth quarter 2010 of roughly 3.5 million shares, but then sold over 500,000 shares in the first quarter 2011 and another 450,000 in the second quarter 2011. At the end of the third quarter, Paulson had 2.5 million shares in WHR. The stock has been a disappointment for him. The average share price was $82.04 when he initiated this position, but WHR was trading at just $49.06 at the end of business on November 30. The company has a one-year target estimate of $67.33 and pays a $2.00 dividend (4.10% dividend yield). The prospects for WHR may be consistent – WHR earnings grew by 6.54% per annum over the last five years and are expected to grow 8.10% per annum over the next five – but that isn’t enough for investors looking to profit in the company in the short to medium term (like 1-5 years) when its industry is forecasted to grow 35.38% per annum. Further, WHR is in the sort of business that is heavily affected by the economy. A lot of WHR’s business is geared toward consumers with income to burn. After all, most people don’t wait until they actually “need” a new washer or dryer to buy. I recommend this stock as a hold and caution investors to only buy the stock in they are willing to hold it until the economy improves.
RLJ Lodging Trust (RLJ) is a real estate investment trust based in Maryland. It has a variety of brands in its portfolio, including SpringHill Suites, Embassy Suites, Hampton Inn and several Marriott properties. Paulson owned 2.75 million shares in the property at the end of the third quarter 2011, in a position valued at $35.12 million. RLJ was trading at $16 at the close of November 30, with a one-year target estimate of $17.86, and it offers a 60 cents dividend (3.80% dividend yield). That may not sound too promising but I am rating this company as a buy at $15.50. It is trading a bit high at 68.01 times its earnings, but it has a much lower forward P/E ratio (38.32). Moreover, it has quarterly revenue growth of 44.16% – three times that of its nearest competitors Hospitality Properties Trust (HPT) and Host Hotels and Resorts (HST), which report 13.30% and 13.50% respectively.
Weyerhaeuser (WY) is a foresting and construction company. It grows and harvests trees, manufactures wood products and builds homes, on contract and in developments. Paulson had 23.56 million shares in the company at the end of September after initiating a new position in the company during the first quarter 2011 of 31.7 million shares and subsequently selling small groups of shares in the second and third quarters of 2011. When Paulson opened his position in WY, the average share price was $23.38. While the share price is much lower now (it was trading at $16.79 at the close of trading on November 30), analysts predict the stock could go as high as $24 in the next year. The deciding factor will be the economy – after all, fewer people build when the economy is down. One thing in WY’s favor is that it is heavily vertically integrated, so when the jobs do start coming in, it will be able to deliver for less than its competitors because of the savings enjoyed by not having a middle man for much of its supplies. The only question is when will that happen. Investors could buy this stock if they are planning on holding it for a while but I am recommending this as a hold until the economy shows signs of improvement.