5 John Paulson Picks With 20% Upside

Includes: CVS, ECL, IDCC, MYL, WIN
by: The Ethical Investor

John Paulson is the founder and President of Paulson & Co., a very popular and respected hedge fund with $21 billion under management. He made his name by short selling subprime mortgages in 2007. For this article, I have selected five stocks purchased by John Paulson during the 3rd quarter of last year, which offer a minimum return of 15% from current levels. I estimate that most of the names on the list will deliver a return greater than 20%.

The list is fairly broad and includes stocks from the technology, consumer/non-cyclical, and healthcare sectors.

InterDigital Inc. (IDCC)

InterDigital is a $1.97 billion company by market capitalization and is engaged in the design and development of digital wireless technology. The stock went through a series of buyout rumors last year with the list of possible suitors including Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Paulson initiated a position in IDCC by acquiring 3,000,000 shares. I hesitate to estimate the entry price paid by Paulson as the stock took off from $43 in mid-July to $74 by the 3rd week. With rumors subsiding, the stock is back to where it was trading prior to these buyout reports. It will be interesting to see if Paulson continues to hold this position at the end of Q4.

The company is expected to grow its earnings at an annual rate of 15% compared with the 27% growth rate of the past five years. Applying my estimated P/E of 19 to 2012 EPS of 2.77, my initial 12-month price target for IDCC is $53 a share. A return of 22% is possible from current levels.

Ecolab Inc. (ECL)

Ecolab operates in the personal and household products industry and provides cleaning and sanitizing products, as well as pest elimination, maintenance and repair services. Paulson initiated a new position in ECL by purchasing 9,177,000 shares at an estimated average price of $50.55. This investment was profitable for Paulson with the stock currently trading at $59 a share.

The company is expected to grow its earnings at an annual rate of 15% which is on par with the broader industry. Applying a P/E of 25 to 2012 average analyst EPS estimate of $3.03, my 12-month price target of $76 is obtained. The stock appears grossly undervalued to me at current levels.

Mylan Inc. (MYL)

Mylan is a $9.46 billion generic and specialty pharmaceutical company and is headquartered in Canonsburg, PA. Paulson increased his position in Mylan by 67% by purchasing approximately 9.95 million shares at an estimated average price of $20.8 a share. The investment is modestly profitable with the stock trading at $22.2 a share.

My 12-month price target for MYL is $29 a share obtained by applying an earnings multiple of 12 to 2012 EPS estimate of $2.39. MYL therefore offers a return of 29% from current levels.

CVS Caremark (CVS)

CVS is by far the best known name on the list and does not need further introduction. Paulson initiated a new position by buying 2,500,000 at an estimated average price of $35.41 a share, which is about 18% below yesterday's closing price of $42 a share.

CVS grew at an annual rate of 12% during the last five years and is expected to have a respectable growth rate of 10% during the next five years. My target of $49 implies a return of 17% from current levels.

Windstream Corporation (WIN)

WIN provides complex data, high-speed internet access, and transport services to businesses and governmental agencies. The company sports a very high yield of 8.5% and I would not be surprised if the company reduced its dividend to a more reasonable level. I would buy the firm primarily for capital appreciation and not the dividend yield. Applying a P/E estimate of 17 to 2012 EPS estimate of $0.82, my 12-month price target of $14 is obtained. A return of 19% is possible from current levels.

Paulson opened a new position in WIN by purchasing 4,140,000 shares at an estimated average price of $11.85 a share, which is very similar to yesterday's closing price.

As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research. Of the companies listed above, I find ECL particularly attractive based on fundamentals and growth prospects.

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