2 Stocks To Avoid And 5 Worth Buying From John Paulson's Portfolio

by: Brian Gorban

John Paulson is the President and Portfolio Manager of Paulson & Co. Inc. Mr. Paulson received his MBA with high distinction from Harvard Business School, as a Baker Scholar, in 1980. He graduated summa cum laude in Finance from New York University's College of Business and Public Administration in 1978. Prior to forming Paulson in 1994, John was a general partner of Gruss Partners and a managing director in mergers and acquisitions at Bear Stearns. Moreover, he gained great fame in 2007 by profiting approximately $4B in just one year by shorting the subprime mortgage market. He hasn't had a great year this year, but his long-term track record is enviable with a 10-year cumulative return as of the end of 2010 at 250% against only 16% from the S&P 500 and 15-year at 685% against only a 170% return from the S&P 500. Needless to say, he knows how to pick great winners, so why not analyze his most recent moves and see if we can benefit.

Motorola Mobility Holdings, Inc. (MMI) provides technologies, products, and services for mobile and wire line digital communication, information, and entertainment applications. This is a new holding for Paulson and he went in big with 9M shares. The valuations are irrelevant for Motorola as this is a merger-arbitrage play based on the $40/share Google (GOOG) buyout. I’d avoid that as there is little reward, but big risk, in the small chance the deal does not go through or gets held-up.

News Corporation (NWSA) operates as a diversified media company worldwide. This is another new holding for Paulson and he’s gone in big here as well with 14.7M shares. News Corp. is run by the Murdochs and was in the news during the summer with the phone hacking scandal in England. Things have looked to calm down and the stock has some decent value trading at just under 18x P/E and 1.3x P/S. However, the company trades at a relatively high 1.7x P/B, only 1% dividend yield, and most importantly opaque succession plan and resulting reputation damage from the scandal. I definitely don’t think NWSA is a short, but don’t quite think it’s a buy at these levels and with its lack of clarity.

Mylan Inc. (MYL), together with its subsidiaries, engages in the development, manufacture, marketing, licensing, and distribution of generic and branded generic pharmaceuticals, specialty pharmaceuticals, and active pharmaceutical ingredients (APIS) worldwide. Paulson upped his already very large stake by almost 67% and now holds a massive 24.9M shares. Mylan has some decent value at a trailing 20x P/E, 8x forward P/E, .8x PEG, 1.3x P/S, and nice FCF this past year of well over $700M. I like Mylan's business model as generic drug makers have less risk than the R&D drug companies and more consistent cash-flow. I think Mylan is a solid buy.

Capital One Financial Corporation (COF) operates as the bank holding company for the Capital One Bank (USA), National Association and Capital One, National Association, which provide various financial products. Paulson upped his already massive stake by another 5%, going in a different direction from this other famous investor and now holds 22.2M shares. This is one of the better run financial firms and trades at an attractive 7x trailing and forward P/E, .8x PEG, .7x PEG, and a relatively strong ROA and ROE of 2% and 12% respectively. I think this is a buy.

Medco Health Solutions, Inc. (MHS), a healthcare company, provides clinically-driven pharmacy services for private and public employers, health plans, labor unions, government agencies, and individuals primarily in the United States. This is a new holding for Paulson, but relatively small at 700,000 shares. Medco has some compelling value, much like these other drug stocks, at just .3x P/S and EV/S, 1x PEG, 16x trailing P/E, 12x forward P/E, and strong FCF this past year of over $2B. I think MHS is a nice buy.

Talisman Energy Inc. (TLM), an upstream oil and gas company, engages in the exploration, development, production, transportation, and marketing of crude oil, natural gas, and natural gas liquids. Paulson made this another new holding and owns a big 8.7M shares. This looks to be a decent value play as energy is starting to increase in price again and has attractive valuations at a 9x forward P/E, just 4x EV/EBITDA, and 1.2x P/B. This is more speculative as commodities inherently are, so I’d put this as a speculative value buy.

CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. Paulson made this another new holding with 2.5M shares. CVS has some nice volume at a 15x trailing P/E, .5x P/S and EV/S, great FCF this past year in excess of $2.5B, and consistently growing 1.3% dividend yield. I think CVS is a quality buy.

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