Profit Powerhouses John Paulson Is Buying

Includes: CAG, COF, NWS, THC, WFC
by: Investment Underground

By Larry Gellar

Yesterday we discussed what Bruce Berkowitz has been buying lately, and today we’ll be taking a look at what John Paulson has added. As head of the famous Paulson & Co., Paulson is one investor who's seemingly always being watched. Let’s see what he likes:

Wells Fargo & Co. (NYSE:WFC) – On a day when Bank of America (NYSE:BAC) went up over 10%, WFC had a nice day too, increasing over 2%. As usual, mortgage-backed securities are still in the news for these companies, which are now trying to deter consumers from refinancing their loans. This helps to ensure that the value of the mortgage-backed securities stays intact. Also in the news has been the demise of Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) stock, both of which are trading close to 52-week lows.

As more of a Main Street bank, WFC may be well-positioned for a world without giant standalone investment banks. As far as value metrics, note that WFC currently trades for a premium compared to Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM). WFC’s price to earnings ratio is 9.47, compared to 8.79 for C and 7.65 for JPM. Operating margin and price/earnings to growth are about middle of the pack for WFC, while price to sales is a bit high. Cash flows for 2011 have been strong with $8.015 billion coming in so far, while 2010 was weaker due to significant debt payments. It’s been pretty quiet as far as company-specific headlines go, although WFC did recently announce the hiring of a new director for the company’s insurance services in Chicago and Milwaukee.

News Corp. (NASDAQ:NWS) – NWS has recovered nicely from lows of under $14 at the height of the company’s phone hacking scandal. We had a feeling this might happen, as News Corp. still remains a rather valuable company. Regardless, the damage is not over yet, as there is now an investigation into whether families affected by the 9/11 terrorist attacks were also victims of phone hacking. On a more positive note, News Corp. subsidiary Fox has bought rights to broadcast the Europa League for 2012-2015. While this is a fairly small transaction for the broadcasting giant that is News Corp., we still think this is a smart move in the face of increasing demand for soccer in the United States.

At least one analyst firm doesn’t like the company, though, as it was recently downgraded from Buy to Hold at Needham & Co. They cited “powerful enemies” that are determined to bring NWS down, in addition to the fact that NWS has historically performed poorly in volatile markets. With a beta of 1.64, the risk is definitely there. Other popular choices in this industry include Time Warner Inc. (NYSE:TWX) and Walt Disney Co. (NYSE:DIS), both of which are trading at lower price/earnings ratios. P/E for NWS is 16.19, compared to 12.86 for TWX and 13.79 for DIS. Operating margin is also relatively weak for NWS, about 5 percentage points lower than for DIS and TWX.

Capital One Financial Corp. (NYSE:COF) – This stock’s recent performance has largely been affected by its pending acquisition of ING Direct (NYSE:ING), and this transaction will need a stamp of approval from the Federal Reserve. This is due to possible implications to the financial system as a whole, although it is hard to imagine the deal being blocked by the Fed. AThe company’s assets are quite small compared to the goliath that is Bank of America, and it is not involved with the type of investment banking that Goldman Sachs and Morgan Stanley are known for.

Acquisition aside, Capital One has also been benefiting from increased use of credit cards as well as fewer defaults. Future economic data could impact COF's price significantly. Analysts have also been excited about Capital One’s purchase of HSBC’s (HBC) U.S. credit card business. With this and the ING deal, it is perhaps shocking that COF’s price/earnings ratio is only 5.86. Note that this significantly lower than American Express (NYSE:AXP) and Discover Financial Services (NYSE:DFS). Price/earnings to growth is also low, while price to sales is closer to average for the industry. Cash flows have also been good, with $1.394 billion come in for 2011 so far.

Tenet Healthcare Corp. (NYSE:THC) – Tenet had a big day Wednesday, up over 6%. In fact, one set of criteria predicts good things for the stock (as discussed at another Seeking Alpha article). That article explains that not only have analysts been quite accurate in their THC predictions, but also they’re now predicting an upswing for the stock. Of course, with today’s big action, the window for price appreciation may no longer be open, but it’s still something to keep an eye out for. With a beta of 2.2, keep in mind that this stock is a rather aggressive pick, especially when compared to some other choices in the healthcare industry.

On the other hand, this stock’s price to earnings ratio is significantly lower than what it has been historically. It’s also a mere fraction of other companies like HCA and Universal Health Services (NYSE:UHS). Compare the price/earnings ratio of 2.49 for THC to 9.44 for HCA and 12.14 for UHS. Price/earnings to growth is about middle of the pack for THC, though. Also note that operating margin and gross margin are relatively weak for THC. As for company-specific headlines, Tenet is the middle of a heated lawsuit with Community Health Systems (NYSE:CYH), which attempted to take over Tenet earlier in the year.

Ralcorp Holdings Inc. (RAH) – Ralcorp makes a variety of food products, and this stock is an immensely popular choice for defensive investors, with its microscopic beta of 0.15. In fact, RAH stock price has barely moved despite the U.S.’s recent economic problems. The company has also been fending off takeover bids from ConAgra (NYSE:CAG), and it may not be long before ConAgra attempts other methods of securing the company. RAH executives claim that spinning off Post Cereals is a wiser move than accepting ConAgra’s bid, although many shareholders are unconvinced. Ralcorp has been quite successful with its gluten-free products.

Potential investors should be aware that RAH does not offer dividends, unlike many other food companies. The price/earnings ratio is also a bit inflated for RAH, currently 20.16. This is somewhat larger than for competitors such as General Mills (NYSE:GIS), Kellogg (NYSE:K), and Kraft (KFT). Margins for RAH have also been comparatively weak – gross margin is 26.8% and operating margin is 12.25%. On the other hand, RAH’s price to sales ratio is lower than for the other companies. Note that RAH has been actively paying off debt lately, and this has made cash flows close to neutral. In fact, the company is only up slightly in this regard for 2011 to $17.9 million.

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

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