Your Cheat Sheet to John Paulson’s Investment Strategy
Legendary Investor John Paulson, the man who made billions by betting against banks during the financial crisis, and then profited more by investing in their recovery thereafter, made news today by releasing the latest on his investment strategy and economic outlook. Paulson is sticking with his guns, maintaining the belief that U.S. stocks are cheap.
Here are some highlights from Paulson’s memo.
“More volatility in portfolio than would have expected…Fundamental thesis has not changed, earnings are in tact despite balance sheet restructuring. Believe positioned to perform well over long term.”
“Equity risk premium is most favorable of all asset classes right now. All other asset classes (credit) have risk premiums at all time lows. Equities should benefit from relative value. Global GDP growth of 4-4.5%.”
The hedge fund manager was less bullish in his outlook on housing, “Don’t believe housing market will recover for another 18-24 months. Should not be any surprises with respect to housing market. About 3MM homes in inventory (foreclosures), despite that the market still reacts to the news…While there is pressure on house prices, we are bouncing along the bottom.”
Paulson moved on from his macroeconomic pointers to offer his views on investment strategy, “EPS in the S&P 500 (NYSE:SPY) are rising dramatically, 30% QoQ range over last few quarters. Despite that growth, P/Es remain near historical lows. Stocks are cheap despite corporate strength…Getting positioned early is where you see greatest asymmetry.”
More on the famed investors individual holdings, “1. Exposure to banks, Long exposure to banks has contributed 25% to underperformance. Have made money on short bank positions, mostly European banks, and have been positive contributors. Uncertain regulatory environment is US has held down (NYSE:C) and (NYSE:BAC). Don’t think Basil additional 7% capital requirements will still go through, but market has reacted to it…Overall thesis has not changed. Remain bullish on banks.” Also watch these banks: Deutsche Bank (NYSE:DB), JPMorgan Chase (NYSE:JPM), HSBC (NYSE:HBC), Metlife (NYSE:MET), PNC (NYSE:PNC), U.S. Bancorp (NYSE:USB), Financials (NYSE:XLF) and Wells Fargo & Company (NYSE:WFC).
And then he talked gold (NYSE:GLD), “despite prices up 7% YTD, gold miners (NYSE:GDXJ) are down. AngloGold (NYSE:AU) is 3rd largest gold producer with best leadership, in Paulson’s opinion, and will ultimately lead to outperformance.” For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to Wall St. Cheat Sheet’s acclaimed Gold & Silver Investment Newsletter.
Then more on some of his other holdings, “Transocean (NYSE:RIG). Prior to collapse it traded up to $180. Fell to $40 in 2008 and then on Macondo spill back to $40. Believe EPS over next two years will top 2008 high…Think its worth $109-153 in 2012-13.”
“Hewelett Packard (NYSE:HPQ). Fundamentals are improving, but there has been a lot of short term issues, management change. Sino Forest. Had the position for many years. Lost some money YTD… Allegations in May have hurt stock dramatically…Cannot comment on current views on that stock for a variety of reasons.”
Finally, Paulson ends the memo addressing more macroeconomic concerns, he talks Greece, “Macro risks: Greece. 3 Plans on table. ECB voluntary debt rollover. German plan bond exchange (technical default). Fitch believes German plan is a default and ECB is not. Last option is a middle ground,” and then ends on QE policy, “Once QE2 is really over and the fed begins to pull back the excess liquidity the banks will be forced to lend. Market is not thinking what it will be like 1-2 years from now.”
For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to Wall St. Cheat Sheet’s acclaimed Gold & Silver Investment Newsletter.