Billionaire John Paulson's Top Moves

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Billionaire John Paulson manages some $29 billion and runs the Paulson & Co. hedge fund. His hedge fund is one of the largest in the world, focused on merger, event and distressed strategies. Prior to founding Paulson & Co. in '94, John was managing director of M&A at now-defunct Bear Stearns. Outlined below are some of Paulson's interesting buys during the first quarter (check out Paulson's new picks).

Gold bug

Paulson has long been a gold bug, and he currently has his hedge fund's top equity holding as SPDR Gold Trust, which makes up 19% of the hedge fund's portfolio. Paulson's other big gold bet is AngloGold Ashanti (ADR) (NYSE: AU), making up the fourth spot in the fund's portfolio. AngloGold is the largest gold producer at 7 million ounces per year, with operations across three continents. 

One of Paulson's big investment theses for AngloGold is that the company could unlock shareholder value if it split into two; more specifically, splitting the South Africa and non-South Africa operations. Fellow South Africa gold miner, Gold Fields, spun off its South African operations earlier this year. 

The AngloGold breakup would look something like "a high-growth international business and a mature high dividend-paying South African company,” according to Paulson. The recent headwinds in South Africa continue to pressure the stock. AngloGold is down nearly 50% year-to-date, and now trades near the bottom of the industry. 

This comes as South Africa released its first quarter GDP results, which were worse than expected. Operating expenses for the country are also up. Operating expenses were up 32.5% in just two years for AngloGold, while revenue rose only 19%. AngloGold now trades on the cheap, at only 8.9 times earnings. This compared to to Goldcorp at 16.3 times, NovaGold at 24.8 times, and Newmont Mining at 10.5 times. 

Telecom tussle

Paulson's number-two stock holding is Sprint Nextel (NYSE: S), after an 80% increase in shares owned, makes up 8.1% of the portfolio. Sprint is in the middle of a battle between Dish Network and SoftBank for control over the telecommunications company. Back in 2012, Sprint Nextel agreed that SoftBank would invest $20.1 billion for a 70% ownership, but earlier this year Dish Network moved in with a competing offer.

The Softbank deal received Committee on Foreign Investment in the U.S. last week, which gives it a leg up on the Dish deal. Softbank also upped its offer by 7.5% to $21.6 billion. Meanwhile, Dish has also made a bid to buy Clearwire. Clearwire decided to postpone its shareholder vote on Sprint Nextel's offer to buy the company in an effort to review the $4.40 per share offer from Dish, and earlier this week announced it is urging shareholders to vote for the Dish deal.

Current Sprint Nextel's EBITDA margins are at only 14%, but consensus expects them to grow to 20% for 2014 and beyond. The margin expansion will be driven by Sprint's Network Vision Plan. The plan is for the large scale deployment of LTE and shutdown of iDEN. So far, this has cost Sprint Nextel $4.4 billion over the past three quarters, and it is expected to invest another $6 billion by the end of the year. 

The long-term benefits of this Network Vision Plan are that it will help reduce operating expenses over the long term by eliminating duplicate fixed costs on running different networks. Also, spectrum capacity gained from a Clearwire acquisition will help Sprint lower capital expenditures related to capacity increases. 

Billionaire Leon Cooperman is alongside Paulson as a big investor in Sprint. The mobile communications company is Cooperman's largest stock holding (check out Cooperman's latest moves).

Bottom dollar

One of Paulson's newest additions was Family Dollar Stores (NYSE: FDO). This discount retailer has more than 7,600 retail discount stores in 45 states across the U.S. Family Dollar posted 1Q EPS of $1.21, compared to $1.15 for the same quarter last year, which comes on the back of 18% sales growth. This positive trend is expected to continue, where consensus shows a 12% rise in sales for fiscal 2013, on the back of 7.2% growth in square footage. 

Family Dollar and many of its discount cousins, including Dollar General and Dollar Tree, should be well positioned via increased product offerings and remodeled stores. Family Dollar has been on an aggressive remodeling spree of late. This should help keep customers coming back to the discount retailer even after unemployment decreases and the economy rebounds. Family Dollar plans on renovating 850 stores in fiscal 2013. 

However, worth noting is that margins could be compressed over the interim due to the shift toward the lower margin consumable products. Yet, as far as valuation goes, Family Dollar looks to be well positioned, with a P/S ratio of approximately 0.7 times compared to Dollar General's 1.0 times and Dollar Tree's 1.5 times.   

M&A

However, one of Paulson's big sell-offs was NYSE Euronext (NYSE: NYX), which was 4.2% of Paulson's portfolio at the end of 2012. This stock was likely a merger-arb play for Paulson. At the end of 2012, IntercontinentalExchange agreed to acquire NYSE for approximately $8.5 billion to $9.0 billion. 

NYSE operates six cash-equities exchanges and six derivatives exchanges in half  a dozen countries. While the futures and commodities exchanges seem to be doing well, the cash-equity exchanges have been under pressure due to a tough economic environment. Thus, the acquisition by ICE is a big positive for NYSE. 

Even if the premium for the merger-arb upside is already played out, I would still consider the joint-firm a buy if the deal materializes. The combined companies would be one of the leading exchanges in equities, commodities and derivatives. Also, a rebound in consumer and investor confidence should lead to higher trading volumes. 

Going into the second quarter, NYSE had 35 hedge funds long the stock, which was a 19% decrease from the previous quarter, suggesting that many hedge funds believes there is little value left in playing NYSE as a merger-arb trade. Eric Mindich's Eton Park Capital sold off the largest stake, worth close to $50 million (see Eton's portfolio).

Bottom line 

Billionaire John Paulson still loves gold, and even with the recent plunge in gold prices, one of Paulson's top stock picks, AngloGold, could still provide investors with solid upside. Sprint Nextel is a solid, underrated, investment in the mobile telecom sector. If Dish and Softbank are willing to get into a bidding war over the company, there has to be some value there. 

I like Paulson's Family Dollar play given the company's valuation and plans for robust growth. As for NYSE, I like the ICE-NYSE combo, but would avoid NYSE as a standalone business given its exposure to the weak equity-trading business. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends NYSE Euronext. 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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