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Paulson Says Bet Against Europe to Blame for Down Year, Slashed EU Holdings in Q3
Posted by: Holly LaFon (IP Logged)
Date: December 6, 2012 04:36PM
Paulson’s pessimistic outlook for the European Union and the euro currency cost him in 2012. The founder of hedge fund Paulson & Co. is attributing this year’s losses, which have placed it among the most underperforming hedge funds, primarily to a wrongway forecast that the situation in Europe would worsen and the euro collapse, and positioning his fund accordingly, according to Bloomberg.
"A potential collapse of the Euro triggered by a Greek default or other event could throw the world into recession and serious financial disorder," he wrote in his 2011 year-end letter.
In April, he bet against European sovereign bonds and bought credit-default swaps of European debt, which protect against default, Bloomberg reports. Leaders of the EU, however, have been focused on fixing the endemic problems culminating most recently on Thursday in a 15-page report outlining a plan for a more integrated economic and monetary union. The euro, moreover, rather than collapsing, has gained 0.89% year to date.
Paulson’s Advantage Plus fund was reportedly down 18.4% at the end of October, its second consecutive down year.
As Paulson’s bets in Europe predominantly failed this year, he also largely withdrew from his long stock positions in the continent. The only companies he had investments in going into the third quarter were located in Ireland. During the third quarter, he sold out of one, Covidien Plc (COV) and reduced another, XL Group Plc (XL) by 76.73%. He kept one small Irish position unchanged, Cooper Industries Plc (CBE). He also bought one new European stock, Shire Plc (SHPG), a company registered in Jersey, a non-EU region that does not use the Euro, and headquartered in Ireland.
Paulson sold out of his 1.8 million-share position in the third quarter for $56 each on average. He had opened the position in the first quarter of 2012 for $51 per share on average. Covidien’s stock is up more than 29% year to date.
Covidien develops medical devices, pharmaceuticals and medical supplies. With customers in more than 65 countries, it derives 45% of its sales from outside the U.S.
The company has generated more than $1 billion in free cash flow annually since 2009 and pays a dividend of $0.26, after raising it 16% in September. This year it announced it would spin off its pharmaceuticals businesses and spent $4 billion in acquisitions.
Steven Romick commented on Covidien in his GuruFocus interview:
“We bought Covidien when there was certainly more than one good medical device company out there. We bought Covidien over others at the time because we felt that at the time that it was undermanaged by its former parent, Tyco (TYC). They were short on sales people, they weren’t investing in product development and there were also tax benefits once they became a separate stand-alone company that weren’t available to them when they were part of Tyco. So we felt that sales were going to go up, that margins were going to go up, and we felt that it was a good growing business that wasn’t really well understood by the street at the time. But that was then. It’s not as inexpensive as it was. We’ve owned it for a number of years. It’s been a good stock.”
Indeed, Covidien’s P/B ratio at 2.6 and P/S ratio at 2.4 are close to their 10-year highs. Its P/E is 13.6.
XL Group Plc (XL)
Paulson reduced his position in XL Group Plc from approximately 5.2 million shares to 1.2 million shares for an average price of $22 in the third quarter. He has been reducing the position since the second quarter of 2011.
XL Group is a global insurance and reinsurance company focusing on property, casualty and specialty products. Year to date, its stock went up 27%, trading near a 52-week high at $25.03 per share.
XL Group’s revenue per share has declined at an annual rate of 20.9% over the last five years, with revenue increasing for the last three years; book value declined at a rate of 5.5% over the same period. Its current book value is $38.46, which is greater than its stock price.
In the third quarter, the company’s combined ratio of 92.2% represented a nine point improvement from the same period the previous year, due to a lower number of large losses, fewer catastrophes and positive prior-year development. Net income for the quarter was $171.9 million, increased from $42.4 million the previous year, primarily as a result of improved underwriting results and lower net realized losses on investments and derivatives.
The company has a P/E of 15.3, P/B of 0.7, close to a three-year high, and P/S of 1.1.
Shire Plc (SHPG)
Paulson bought 1,370,800 shares of Shire Plc for $90 each on average in the third quarter. The new buy represents 0.99% of his portfolio.
Shire is a medical treatment company organized in three divisions: specialty pharmaceuticals, human genetic therapies and regenerative medicine. The company’s stock has gained approximately 3.5% year to date. At $90.40 per share on Thursday, it is considerably off of its 52-week high of $108.79.
Shire has grown revenue per share at a rate of 15% annually, free cash flow at 18.8% annually and book value at 13.6% annually, over the past five years. The company has $2.3 billion in cash, $1.9 billion in long-term liabilities and no long-term debt on its balance sheet.
The company’s total revenues increased 1%, hampered by lower royalties from one of its top-selling drugs, Adderall XR, sales of which fell 32% due to another company producing a generic version. Excluding the impact of lower Adderall sales, product sales increased 10% due to strong growth from its Vyanse product for children and adolescents with ADHD, which increased 24%, and other strong increases for other drugs.
For the full year 2012, Shire is expecting double-digit earnings growth for full year 2012. It also expects revenues of Adderall XR to continue to decline as its genetic competitor gains popularity; to compensate, it is investing in several late-stage clinical trials, carefully managing its cost base and prioritizing other investments, which will help it grow earnings in 2013.
Shire has a P/E of 14.4, P/B of 4.3, near a three-year low, and P/S of 3.8.
Cooper Industries Plc
Paulson’s other Irish holding, Cooper Industries, which he did not reduce in the third quarter, was acquired by Eaton Corporation (ETC) on November 30 for $13 billion.
Paulson’s only other international holdings are located in South Africa; they are gold companies Anglogold Ashanti (AU) and Gold Fields Ltd. (CBE). To see more of his trades, visit his international portfolio here or his combined portfolio here.
Guru Discussed: John Paulson: Current Portfolio, Stock Picks
Stocks Discussed: COV, XL, SHPG, CBE, AU, CBE,