Will John Paulson get his mojo back?

The hedge fund giant, who has seen big gains and big losses in recent years, has been selling financials and consumer cyclicals and buying real estate and energy.

By GuruFocus.com Feb 22, 2013 12:59PM
Stock market report copyright CorbisThe hedge fund giant John Paulson's investing philosophy is based on making sector bets based on his interpretation of the macroeconomic picture. The strategy paid off well when he made $3.7 billion in 2007 shorting the subprime mortgage market and another $5 billion in 2010 primarily by betting on gold. But times have been less spectacular since then, with his funds losing 36% in 2011 by being too early in financials and returning 1% in 2012.

In the fourth quarter, Paulson adjusted his sector strategy. He eased more out of financials and consumer cyclical stocks, and made increases to his real estate and energy holdings, according to GuruFocus' Industry Trends of Gurus.

In 2009 and 2010, Paulson thrust 40.3% of his portfolio into financial services. His largest financial positions were in stocks such as Citigroup (C), Bank of America (BAC) and JPMorgan (JPM). His recovery funds, heavily weighted in the banking and insurance industries, performed well in 2010, gaining 24%. Paulson expected the economy to mend in the near future, and further enhance his gains: "We believe the Paulson Recovery Funds are our best positioned funds to benefit from the continued economic recovery in the 2011-2012 timeframe," he said in his 2010 letter.

Instead, the Financial Select Sector SPDR ETF (XLF), which is heavily weighted in bank stocks, lost approximately 20% that year.

Since then, Paulson has been reducing his exposure to the financial services sector every quarter except one. Most recently, he moved the weighting percentage from 8.5% in the third quarter of 2009, to 7.4% in the fourth quarter of 2012 -- his smallest in almost four years.

His largest bank positions in the fourth quarter of 2012 are Capital One Financial Corp. (COF), Wells Fargo (WFC) and Popular Inc. (BPOP), which each account for less than 1% of his portfolio, respectively, though he has larger investments in insurance, including Hartford Financial Services Group and CNO Financial Group.

Vocal on his optimism for housing recently, Paulson seems most interested in houses specifically, and increased the weight of his investment in real estate stocks to 4.5%, his largest exposure in over four years, from 0.5% in the third quarter of 2012.

Paulson gave his opinion on housing at the 92nd Street Y in Manhattan in January. "This is probably the best time in our lifetime to consider buying a house," he said, for several reasons, NBC reported:

- Housing in a "strong recovery"
- Robust domestic energy market
- Use of credit picking up (credit cards, auto loans, mortgages)
- Stock market rally

In 2012, his Real Estate Recovery Fund was one of the few of his funds to achieve a gain, with a 20% return for the year.

His largest new position in the real estate sector in the fourth quarter was Realogy Holdings Corp. (RLGY). He bought 13,302,344 shares of the company for $37 per share on average, accounting for 3.4% of his portfolio.

Realogy Holdings is a real estate franchising company with business brands and units such as Better Homes and Gardens Real Estate, Century 21, Coldwell Bankers, and several others. The company held its IPO in October 2012, with shares priced at $27 each. It has a $6.26 billion market cap, and its shares have gained almost 26 percent since their debut, priced at $43.05 per share Thursday afternoon.

Realogy's net revenue for the fourth quarter increased 30% year over year to $1.2 billion, with a net loss of $292 million, after $400 million in primarily non-cash IPO-related costs, and other charges, and perceived a housing recovery in the works:

"The strength of the year, and in particular our strong fourth quarter results, supports the growing consensus of a housing recovery," said Richard A. Smith, Realogy's chairman, chief executive officer and president. "The favorable housing trends we experienced early in 2012 were evident in the fourth quarter, and our first quarter 2013 closed sales volume and open contracts indicate the continuation of the housing recovery."

Paulson's shift to energy was more pronounced, as he increased his weighting in the sector from 1.3% in the third quarter to 10.7% of his portfolio in the fourth quarter of 2012, as he got in on merger and acquisition activity in the industry. Paulson did not speak on energy in his talk at the 92nd Street Y in January, except to mention that he was bullish on the sector.

He bought four new oil and gas companies, and increased his position in one other, Nexen (NXY), in the fourth quarter, making it is largest holding of the sector. He bought 19,445,000 shares of the company in the fourth quarter for $25 per share on average, increasing his shareholding to 24,495,000 shares. He started buying the stock in the third quarter.

With a $14.53 billion market cap, Nexen is an energy company with plays in conventional oil and gas, oil sands and shale gas. The company's stock leapt in July when it announced that it would be acquired by CNOOC Ltd. (CEO).

He bought 12.8 million shares of his largest new buy, Plains Exploration & Production Company (PXP) for $39 per share on average. The company's stock jumped in December when the company announced it would be acquired by Freeport McMoRan Copper & Gold Inc. (FCX). Paulson also bought 9 million shares of Freeport McMoRan in the fourth quarter, which will acquire McMoRan Exploration (MMR), a company Paulson also bought 15.6 million shares of.

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