Why Is John Paulson Doing So Badly?
In Paulson’s third-quarter 2011 letter, he said that he had positioned his portfolios for what clearly did not happen – growth in the U.S. and an orderly resolution of Europe’s sovereign credit issues. Nevertheless, he believed the businesses he had chosen performed well. “Macros fear is the driving force behind the markets,” Paulson said, “rather than corporate fundamentals.”
At the time, Paulson foresaw his positions improving as fear subsided, the European sovereign debt crisis stabilized and the U.S. economy continued to grow. So far this year, Europe’s debt crisis has not stabilized and key U.S. economic data suggests that his expectation of a recovery was overly optimistic. In July, U.S. retail sales rose 0.8% month over month, the first increase since March, and housing starts declined 1.1% month-over-month, according to the Commerce Department. Jobless claims for July declined slightly from June, and the economy added 163,000 new jobs in July, the biggest monthly gain since February.
U.S. GDP growth declined slightly in the second quarter, growing at a 2% pace from January to March, compared to 1.7% in April to June, which was higher than the 1.5% rate economists estimated.
Most of Paulson’s top stocks are up for the year. Each of his largest positions, SPDR Gold Trust (GLD), third largest, Delphi Automotive Plc (DLPH) and fourth largest, The Hartford Financial Services Group (HIG), has increased single digits year to date. His fifth largest, Mylan Inc. (MYL) is up over 10%.
Two of his top positions that have declined are MGM Resorts International (MGM) and AngloGold Ashanti (AU). MGM Resorts International, is a global hospitality company, operating a portfolio of destination resort brands, including Bellagio, MGM Grand, Mandalay Bay and The Mirage. MGM Resorts has a market cap of $5.04 billion; its shares were traded at around $10.145 with and P/S ratio of 0.59.
MGM experienced losses per share from 2008 to 2010, and recovered to a net profit of $6.37 in 2011, due largely to the consolidation of MGM China Holdings. However, it has reported losses for the last four straight quarters. Revenue per share has increased at an annual rate of 2.1% over the last ten years.
The company’s biggest second-quarter increase was in casino spending which nearly doubled this year, from $1.39 billion in revenue in the first six months of 2011 to $2.6 billion in the first six months of 2012. It also saw an increase from $193 million in revenue in the second quarter of 2011 to $709 million in the second quarter of 2012 at its MGM China, while revenue at its wholly owned domestic resorts was essentially flat. MGM has a leveraged balance sheet with $1.7 billion in cash and $13.4 billion of indebtedness.
Paulson also has a large position in Caesar’s (CZR) and presented the company at the 2012 Ira Sohn Conference. That stock is down 52% year to date. On his conference call with investors Wednesday, Paulson said that these positions were highly levered to the upside in the event of a strong economic recovery, which has not yet occurred.
The stocks weighing the most on Paulson’s returns on are those related to gold. In his third-quarter letter, Paulson theorized that the valuation of gold stocks would catch up to their fundamentals, which has failed to materialize.
His largest holding at almost one-third of his portfolio, SPDR Gold Trust ETF (GLD), has increased almost 6% year to date, but others have fared worse. AngloGold Ashanti (AU), his second largest position and more than 9% of his portfolio, has fallen almost 27% year to date.
AngloGold Limited is the largest gold producer at 7 million ounces a year, with reserves of 126 m oz. AngloGold Ashanti Limited has a market cap of $12.93 billion; its shares were traded at around $31.13 with a P/E ratio of 9.25 and P/S ratio of 1.87. The dividend yield of AngloGold Ashanti Limited stocks is 1.77%.
Paulson said in May at the 2012 Ira Sohn Conference, “[AngloGold] has not been a good performer over the last couple of years. For me, that represents an opportunity.”
Though the company’s revenue and profits soared in the last year, he said it is currently near its lowest valuation in a decade. If the company were valued at the level of its peers, he said, it would be about 75% higher.
His second-largest gold stock, Gold Fields Limited, declined 19% year to date. NovaGold, his third largest, declined 47%.
Gold is up almost 6% year to date, after a multi-year rally to record highs in 2011. Paulson said that through the third quarter of 2011, all the gains in his gold funds came from derivative positions correlated to the gold price. Meanwhile, mixed performance in his gold stocks offset all of the gains from his derivative positions. There is no way to know whether that occurred again this year.
Because the majority of Paulson’s largest positions are doing well aside from gold positions, the worst detractors from his returns might be unreported shorts, derivatives or others.
Though Paulson’s returns have cratered recently, aside from 2011, he has had only one other negative year since his firm’s inception in 1994.
See his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of John Paulson.