John Paulson became famous in 2008, when he made billions shorting the real estate market. More recently he has taken well-publicized bullish calls on gold (via GLD). He is one of the most followed hedge fund managers on Wall Street and as such, his picks have a tendency to move the market. With that in mind, I reviewed his portfolio from whalewisdom.com.
Delphi Automotive (DLPH)
I have already recommend Delphi Automotive, one of the most interesting picks in the auto sector and a stock also selected by David Einhorn. You can read my earlier thoughts here.
Recently Delphi Automotive reported solid results, showing investors that the business is performing well. DLPH reported earnings of $1.04 per share, $0.12 better than the Capital IQ consensus estimate of $0.92 while revenues rose 2.4% year after year. Management upgraded its expectations in both earnings and revenue growth. I invested in DLPH following a recommendation from investment newsletter Warren Trades.com.
Barclays issued a strong report related to DLPH and analyzed the strong rally of North American suppliers this year. Yet despite the run up, valuation metrics are still cheap by historical standards. According to Barclays' Brian Johnson, in 2012 investors should focus on selecting the best auto suppliers. He recommends Delphi as best in breed.
Anglogold Ashanti (AU)
In this case, I analyze Paulson's investment in Anglogold Ashanti which beat earnings expectations, reporting earnings of $429 million, or $1.11 per share. Management is expanding the business. In the call, management explained that the company's board authorized cpaital expenditures of $1.9 billion over the coming five years to expand the Cripple Creek & Victor mine in the US and develop the Mongbwalu and Kibali projects in the Democratic Republic of Congo. The projects will be funded internally and are expected to contribute to an additional annual production of more than 500,000 ounces to AngloGold.
AngloGold Ashanti, the third-largest gold producer in the world, operates mines on four continents. One risk from investing in AU is the company´s high cost structure, since AngloGold generates the majority of its gold production in South Africa and Continental Africa (which tend to be higher cost gold mining jurisdictions).
Recently, Mylan Laboratories announced an increase in its guidance range for 2012 from $2.45 to $2.55 in adjusted diluted earnings per share. Mylan's previous guidance range for 2012 was $2.30 to $2.50 per share. All of Mylan's other 2012 guidance metrics remain unchanged. Mylan CEO Heather Bresch commented:
"As we have said previously, we expect 2012 to be the best year to date in Mylan's history. The increase in our guidance is a result of our continued strong operational performance."
The company's board of directors also announced the repurchase of up to $500 million of the company's common stock in the open market. Mylan executive chairman Robert J. Coury also stated:
"Given our current share price and the continued strong performance of our business, we believe that the repurchase represents an appropriate use of our capital and an opportunity to return value to our shareholders, while still maintaining significant financial flexibility for the right strategic opportunities."
Mylan is one of the leading players in the generics pharma market. The company is the number two player in the US generics market, and the largest in the world with $47.5 billion in revenues for the twelve months ended November 2011. It also has a strong foothold in the European market. Among the top ten generic retail pharmaceutical markets in Europe, Mylan holds a leading position in France, is second in Italy and third in Belgium, Portugal, UK and Netherlands. Mylan is well-placed to capture greater market share with more drugs slated to lose patent exclusivity in the forthcoming period.
MGM Mirage (MGM)
Recently Compass Point issued a very interesting report explaining what is happening in Macau, the strongest driver for big casino stocks. Compass noted a deceleration in May and expects further declines in 2012. Overall it estimates that the second half of the year will mark the reversal of a two year trend of continuously increasing estimates, so it recommends selling stocks like Wynn Casinos (WYNN), Las Vegas Sands (LVS) and MGM Mirage.
The bull case for MGM is that in Macau, MGM continues to benefit from robust market growth and drives a solid share of the total revenue. Macau is now the largest gaming destination in the world. The company intends to expand further into Asia and acquired properties in 2011 in Sanya on Hainan Island and Chengdu as well as a longer-term expectation to build properties in several other cities, such as Beijing, Shanghai, Tianjin and Nanjing (all in China). The company is also in an agreement to offer hospitality in Mumbai, India by building a Bellagio, an MGM Grand and an MGM Skywalk and also plans to set up a property in Vietnam, which is expected to open in 2013. So, MGM will expand in Asia, which will drive revenues and earnings not dependent on Las Vegas market.
Shares are undervalued. On a price to book value basis, shares of MGM Resorts trade at 0.7x, which is a significant discount to the industry average of 2.2x. Still, I'd stay away from MGM for now due to its leveraged balance sheet and future deceleration in Macau and other Asian destinations, given the current global macroeconomic uncertainty.
Anadarko Petroleum (APC)
Anadarko has shown strong financial discipline by prudently managing its finances. Financial discipline enables the company to capitalize on the flexibility of its global portfolio, while allowing it to pursue new strategic and tactical growth opportunities. Anadarko ended 2011 with roughly $3.48 billion in cash on hand and maintained access to its $5 billion undrawn credit facility. Debt is very manageable compared to its peers. The company leveraged its strong financial position to finalize its settlement with BP plc. for all current and future claims associated with the Deepwater Horizon accident.
Also, Anadarko's project management expertise is considered among the best in the industry. It has a proven track record of identifying and executing high-impact projects. APC develops value-accretive world-class resources and builds an optimized global portfolio, while managing actively both surface and subsurface risks.
I like this stock because it is cheap at current levels, making the case for a very compelling snap-back rally. Anadarko shares are presently trading at 6.6x trailing 12-month cash flow, compared to an 18.2x average for the peer group. Also, this stock went down more than 30% in less than two months at the beginning of the year, a sell-off I believe was exaggerated.
Other stocks that Paulson likes
Paulson also likes Hartford Financial Group (HIG) and Capital One (COF). A recent research report from Stiefel Nicolaus upgraded HIG to buy from hold and set a target price of $24, considering Hartford's current valuation barely covers its "go-forward" businesses, and gives virtually no credit at all for the earnings and deployable capital generation potential of the businesses that are being run off and/or sold. Recently Hartford Financial reported strong earnings. HIG reported Q1 earnings of $1.25 per share, $0.20 better than the Capital IQ consensus estimate of $1.05. Commercial markets net income declined to $207 million in the first quarter of 2012 from $334 million in the first quarter of 2011 and core earnings decreased to $167 million from $196 million in the first quarter of 2011.
Regarding COF, Stifel is adding COF to the Stifel Select List as a top pick in consumer finance. It believes COF shares remain significantly undervalued relative to bank peers, and believes this gap in valuation is poised to close. In the near term, Stiefel believes the financial upside from the ING and HSBC acquisitions will positively surprise and increase confidence in the earnings outlook. In 2013, it expects COF to adopt a more shareholder- friendly capital strategy that should further close the valuation gap with its peers.
Disclosure: I am long DLPH.