In the span of a few years,
went from making the biggest payday in history during the
financial crisis to turning in the worst performance of his
firm's 17-year history in 2011.
& Co.'s biggest funds, the Advantage and Advantage Plus, have
declined a further 13% and 18% respectively through the end of
July. Consequently, Paulson's assets under management have also
dropped from a peak of $36 billion to $20 billion. Many are
wondering how a manager could lose so much so fast. Paulson's
recent performance is due to a combination of several factors.
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
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
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 (
), third largest, Delphi Automotive Plc (
) and fourth largest, The Hartford Financial Services Group (
), has increased single digits year to date. His fifth largest,
Mylan Inc. (
) is up over 10%.
Two of his top positions that have declined are MGM Resorts
) and AngloGold Ashanti (
). 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 (
) 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 (
), has increased almost 6% year to date, but others have fared
worse. AngloGold Ashanti (
), 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
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
. Also check out the
, Top Growth Companies and High Yield stocks of John
Paulson.About GuruFocus: GuruFocus.com tracks the stocks picks
and portfolio holdings of the world's best investors. This value
investing site offers stock screeners and valuation tools. And
publishes daily articles tracking the latest moves of the world's
best investors. GuruFocus also provides promising stock ideas in
3 monthly newsletters sent to