Billionaire John Paulson’s Cheap Stock Picks

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Paulson & Co., the hedge fund managed by billionaire John Paulson has been struggling in recent times due to large positions in gold and gold miners. We have gone through the fund’s most recent 13F filing for the first quarter of 2013; we track these quarterly filings, which disclose many of a hedge fund’s long equity positions as of the end of the quarter, in our database with the included information being used to help us develop investing strategies. We also like to screen picks from individual managers; for example, we can look for stocks with low earnings multiples so that investors can skim these names for potential value opportunities. Here are the five largest positions in Paulson’s portfolio at the end of March that have both trailing and forward P/Es of 13 or lower (or see the full list of Paulson's stock picks):

Paulson's Value Play

The fund increased the size of its position in Aetna (NYSE: AET) by 44% during the first quarter of 2013 to a total of 6.5 million shares. The health insurer experienced a 7% increase in revenue in its most recent quarter compared to the same period in the previous year, though earnings were down. Aetna is valued at 13 times trailing earnings, and we’d note that Wall Street analysts expect an increase in earnings per share on a forward basis; the low multiples are likely due to uncertainty over future regulation of insurers.

Paulson and his team owned 9 million shares of Freeport-McMoRan Copper & Gold (NYSE: FCX), a miner that appeals to Paulson’s bullishness on gold and is also tied to the global economy (its beta is 2.4) on copper production. The stock is currently down sharply from its levels late last year after the company purchased two oil and gas E&P companies, which threatens to diversify Freeport-McMoRan and weaken management’s focus, though this has left it with low earnings multiples. Billionaire Leon Cooperman’s Omega Advisors reported a position of 3.1 million shares in its own 13F (find Cooperman's favorite stocks).

According to the 13F, Paulson bought 2.7 million shares of Hess (NYSE: HES) between January and March. Hess, following pressure from activists, is likely to spin off its downstream businesses. Many value investors like spinoff situations because management of the new company (as well as that of the parent) is better able to focus on core operations. At its current market capitalization, Hess trades at 10 times consensus earnings for 2014 and the company has been reporting growth on both top and bottom lines, so not much improvement is required here.

The fund cut its stake in $16 billion market cap hospital company HCA Holdings (NYSE: HCA) by about 50%, but still owned 3.4 million shares of stock at the beginning of April. Net income was down over 30% last quarter compared to the first quarter of 2012 on flat revenue. The sell-side expects that poor performance to reverse over the next year, and with the market not being too optimistic about HCA (possibly due to uncertainty again), the trailing and forward P/Es come in at 12 and 10 respectively.

Rock-Tenn (NYSE: RKT) rounds out our list of Paulson’s cheap stock picks, as the fund disclosed ownership of 1.4 million shares of the packaging products company in the filing. After nearly doubling in price over the last year, Rock-Tenn still features a trailing earnings multiple of only 13. Revenue was up only slightly in the first quarter of 2013 versus a year earlier (with much better net margins), but the stock is priced low enough that even modest future growth could make it a potential value play. As such we’d be interested in taking a close look at Rock-Tenn.

The Bottom Line

In addition to Rock-Tenn, Hess also offers a combination of decent recent performance and an attractive valuation (though many oil and gas companies are cheap at this time). We’re also interested in Freeport-McMoRan, as while we aren’t fans of management’s acquisitions it is possible that investors have overestimated the amount of shareholder value these deals have put at risk and thus overreacted to the news.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and Rock-Tenn Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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