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John Paulson – What Went Less Wrong in 2011: LNG, APOL, GOLD, GLD, RAH, CAG

December 22, 2011 | About:
Holly LaFon

Holly LaFon

261 followers
John Paulson, who stocked 24% of his portfolio with financials, has had a difficult year. The manager of Paulson & Co. is most famous for reaping outrageous profits during the financial crisis, particularly the world’s biggest payday of $7 billion in 2008. Paulson said in his 2010 investor letter that the secret to his success is “anticipating market events before they are generally recognized.” In 2011, he anticipated market events that failed to materialize. Paulson had positioned his portfolios this year with net equity exposure that would benefit from a financial recovery, increasing gold prices, growth in the U.S. and a resolution of the European sovereign debt crisis. In the most recent confirmed report dated November 30 and the Paulson Advantage fund was down 32.6%, the Advantage Fund Plus was down 45.4%.

In the midst of the unfortunate year, some of Paulson’s 103 stocks are up year to date. The positive performers are:

LNG 51.45
RAH 31.07
APOL 26.99
GOLD 22.57
ARG 20.1
PFE 20.1
TDC 19.73
GLD 11.9
CMCSA 6.19
STX 2.66
WL 2.53
IP 2.02
COF 1.95
Paulson’s best-performing stock this year, Cheniere Energy Inc. (LNG), went up 54% year to date. Unfortunately, he sold his entire remaining position of 2,824,085 shares in the first quarter, at an average price of about $8. He had held the stock since the second quarter of 2008, when he bought 4.7 million shares at about $8.50 per share. Then, he added 2,824,085 shares in the fourth quarter of 2008 at about $2.60 per share. He had been reducing in late 2010 as the price went up.

The company, which is primarily engaged in liquefied natural gas-related business, has grown revenue at an annual rate of 64% per share over the last 10 years.

Similarly, Paulson sold out of Apollo (APOL) shares in the first quarter of 2011, and it has gone up 37% to $52.62 year to date. View his holding history with Apollo here. Apollo’s share price collapsed in 2010 due in large part to disputes in the for-profit education sector and the threat of potentially increased regulations. Congress began hearings that summer over whether federal aid to for-profit college was being used correctly, and numerous lawsuits accusing the schools of fraud or misleading students. Consequently, enrollment declined considerably.

In a Bloomberg article, the Yacktman Funds noted how short-seller of the stock made it cheap enough for them to look at. “'There is a lot of fear-mongering, which is actually great because it causes the stocks to probably overshoot on the downside, giving us the opportunity to look at them,' said Jason Subotky, vice president at Yacktman Asset Management Co. in Austin, Texas, which has $6.7 billion under management.

'“We are glad the short-sellers came along to amplify the uncertainty,' Subotky, whose firm owned 1.67 million shares of Apollo Group Inc. as of Sept. 30, said in an interview. The firm has increased its stake since, he said.”

The brightest spot in Paulson’s portfolio is Ralcorp Holdings Inc. (RAH), a company that manufactures, distributes and markets private-brand food products. It is up 32% to almost $86 year to date. Paulson bought the stock in the fourth quarter of 2010, at about $62 per share, and continued to add shares in the first and second quarters of 2011. In the third quarter, he sold 457,778 shares at about $83 per share.

Ralcorp was most likely an arbitrage play on Paulson’s part. ConAgra (CAG) offered to buy the company on May 4, for $86 per share in cash, a 31.7% premium to its closing price on march 21, 2011, or approximately $4.9 billion, plus the assumption of $2.5 billion in debt. ConAgra noted that press speculation about the offer began as early as April 28, 2011. From April 28 to May 5, the stock jumped 26% to even higher than the ask price.

Ralcorp unanimously rejected the offer on the same day, but ConAgra was undeterred. It sent a new proposal on August 12 offering $94 per share in cash, and Ralcorp reiterated its unanimous rejection on September 19. ConAgra withdrew its proposal on the same day. The stock has since declined to its current price of about $86, which is still far from its pre-acquisition proposal April price of just under $70.

Gold was another high point for Paulson this year. The Paulson Gold Fund Ltd. was up 1.27% at the end of the third quarter. In his third quarter letter, Paulson said, “All of the gain in the year-to-date came from our derivative positions which are correlated to the gold price. Gold stocks delivered mixed performance with producing companies up slightly for the year while development companies were down sharply. Overall, the decline in the gold stock portfolio offset almost all of the gains from the derivative positions.”

The best-performing gold stock in his portfolio was Randgold Resources (GOLD), a gold mining and exploration company focused on West and Central Africa, which is up 26% year to date. Paulson bought 495,000 shares at about $75 per share in the first quarter of 2010, 205,000 shares at about $78 in the first quarter of 2011, and 223,000 shares at about $98 per share in the third quarter of 2011. This highly profitable investment for Paulson trades at about $104 today.

Randgold’s revenue per share has increased at an annual rate of 13% since 2003, and earnings are strong, increasing from $84 million in 2009 to $121 million in 2010. The company has a relatively strong balance sheet with about $600 million in cash, which it wants to use to fund new developments, and $45 million in long term liabilities and debt. The company has reported deepening cash flow losses since 2008. In August of this year, it said it expects an estimated production increase of 70% in 2011 from its pipeline of future prospects.

Randgold has performed better than the SPDR Gold Trust ETF (GLD) this year, which is up 12.5% so far. Gold is Paulson’s largest holding and his eighth best performing. In one of his stand-out investments, he bought 31.5 million shares in the first quarter of 2008 at about $89.50 per share. He did not sell any of his holding until the third quarter, when he traded 11,226,460 shares at about $166 per share.

To explore Paulson's complete portfolio, click here.


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