John Paulson’s Top Stock Picks: 2 To Buy, 1 To Avoid

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John Paulson is the founder and President of Paulson & Co., a New York- based Hedge Fund. He is famous for his bet against subprime mortgages in the last downturn. The billionaire businessman earned $3.7 billion in 2008 by shorting mortgage-backed securities. More recently in 2010, he made $4.9 billion from his portfolio. His fund didn’t do too well in 2011, but given his past track record it is worth looking at some of his recent picks. In this article, I will be discussing three of John Paulson’s big buys from the last quarter.

HCA Holdings Inc. (NYSE: HCA): My Take - Buy

Paulson & Co. bought 1,600,000 shares of HCA Holdings last quarter. HCA reported strong last quarter results with its adjusted same store admissions growth at 4.8%, which was much better than the hospital group average of 1.4%. On the other hand, the company’s same store operating cost increased just 0.2% thanks to the strong cost control by the company. HCA’s market share grew to 23.1% last quarter, a 20 basis point increase from the same time last year. HCA’s market share was up in 9 sevice lines, flat in 4 service lines and down in just 3 service lines.

Going forward, I expect HCA to continue benefiting from its scale and to gain market share.  In addition to organic growth from market share gains and entering new markets, I also expect the company to do some opportunistic acquisitions to fuel growth. Although the company paid a one-time $2 per share dividend last quarter, I expect capital deployment to be more skewed towards M&A going forward. The company is trading at a forward PE of just 6.89x and I believe the stock offers a good buying opportunity at current levels.

Covidien Plc. (NYSE: COV): My Take - Buy

Paulson & Co. bought 1,800,000 shares of Covidien last quarter. Covidien’s last quarter results were much better than its peers. Excluding forex and acquisitions, the company’s organic sales growth was 5.8% roughly twice the Med Tech average. This is the second straight quarter when the company posted better top line numbers than its initial 3-5% revenue growth guidance for FY2012 (Sep.). Its EPS growth of 13% was also ~2x better than its peers.

Covidien is benefiting from better end markets with a heavier skew towards disposables and implantables that have a less elective component than med tech as a whole. A favorable mix shift towards higher-growth, higher margin markets in advanced energy and vascular is also helping the company. In addition, Covidien is incorporated in Ireland because of which it has no restrictions on cash regardless of where it is held, which puts it in a better position to make acquisitions and return cash to the shareholders.

I believe Covidien can post a mid single digit top line growth rate and a 10-11% EPS growth rate in the long term. The company faced several issues in 2011 which led to low single digit top line growth. Once investors realize that 5-6% topline growth which the company has seen in the last two quarters can be sustained in the longer term, the stock will likely see a rerating and its multiple will expand.

Caesars Entertainment Corp. (NASDAQ: CZR): My Take – Avoid

Paulson & Co. bought 12,372,835 shares of Caesars Entertainment last quarter. Caesars Entertainment is one of the largest gaming companies in the world operating 52 casino properties with $8.8 billion in annual revenues and $1.9 billion in annual EBITDA. I don’t like Caesars because of its high leverage – the company has $21.2 billion in net debt and $1.7 billion per year of interest obligations. To manage cost, Caesar has reduced marketing and operating costs and limited its maintenance and growth capex as well. This has in turn resulted in market share losses.

To bet on Caesar, one needs to be sure of a lot of things like a continued recovery in the Las Vegas Strip, macros going in the right direction, and Caesar being able to service its debt obligations. Caesar has very little margin of safety if things go south; thus, the stock appears way too risky to me.

TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Covidien Ltd.. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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