A Dulling Effect

 | Mar 19, 2013 | 3:00 PM EDT
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Over the last couple of years, billionaire John Paulson's investment vehicle has moved more and more into basic materials, per the fund's 13F filings. However, this hasn't been particularly good for Paulson & Co.'s portfolio, so for a bit more insight, we decided to take a closer look at his five largest holdings in that sector -- mainly gold miners -- as of the end of December.

While the fund's largest overall position was SPDR Gold Trust (GLD), the top individual pick was gold miner AngloGold Ashanti (AU). Paulson has been bullish on gold for some time, and has also been buying such miners; in general, many metals bulls have advocated these companies as a better buy than the metal itself. Still, AngloGold has fallen 36% in the last year, likely due in part to weaker business performance, with revenue down 18% year over year last quarter. Over that same period, the GLD has only declined by 5%.

Paulson also initiated a position of 9 million shares in Freeport-McMoRan (FCX) between October and December. The stock took a hit after the company agreed to buy two oil-and-gas companies -- many observers believed the price was too high, and that the purchases would unnecessarily weaken its mining focus. The stock currently pays a dividend yield of almost 4% and trades at 11x trailing earnings. While we don't like the deal, the market may have overreacted. (Billionaire Leon Cooperman's Omega Advisors was also buying shares of Freeport-McMoRan last quarter.)

Another of Paulson's basic-materials picks, with a reported position of 36 million shares, was gold miner NovaGold (NG). Shares of the gold miner, with market capitalization of $1.1 billion, have fallen 44% in the last year. The Wall Street consensus is that the company will be unprofitable this year, and that losses will actually increase for the fiscal year ending November 2014. NovaGold also looks to be a popular short target: It has a short ratio of 11%, as of the most recent data, so we would avoid the stock and search instead for better gold miners.

The fund also kept its ownership of Randgold (GOLD) constant at about 930,000 shares. The company, gold miner with assets located in western and central Africa, is a bit more stable than some of its peers. While the stock price is down from a year ago, both its top and bottom lines rose year over year last quarter -- though earnings improvement was limited. The stock carries trailing and forward price-to-earnings ratios of 18x and 11x, respectively, so it is dependent on future growth in order to justify the current valuation.

Gold Fields (GFI) rounded out Paulson's top five basic -materials stocks. In terms of earnings multiples, this looks like it has value potential -- for example, it is valued at 9x trailing earnings -- but revenue was down by about one-third in its most recent quarter, and this pulled net income down nearly 80%. It's cheap enough to be worth investigating, but we'd be very concerned about those recent financials.

-- Written by Matt Doiron

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