Once again, John Paulson is suggesting by his actions that he knows something we don’t. The zillionaire hedge fund manager – who made billions betting against subprime mortgages and shorting bank stocks over the past two years – has gone big on Bank of America. Paulson became BofA’s fourth-largest owner in the second quarter after buying nearly 2 per cent of the shares in what the FT describes as “a strong endorsement of a bellwether financial institution”.
He also bought shares in Goldman Sachs and various gold and healthcare companies in the quarter, according to an SEC filing.
As The Pragmatic Capitalist notes:
We previously mentioned that John Paulson, hedge fund manager extraordinnaire, was betting big on reflation via various gold instruments and a real estate recovery fund, but this evening we find out that Paulson is betting big on the reflation of all reflation bets: a money center bank.
Regardless of whether BofA seemed a good buy or not (and let’s face it, most people thought the latter a few months ago) it’s achingly clear that whatever Paulson bets big on, he has the critical mass – and the following – to make it succeed. So, of course, the price of BofA stock nearly doubled in the second quarter — when Paulson purchased 168m shares — valuing the billionaire investor’s holding in the bank at $2.2bn as of June 30.
According to Clusterstock’s John Carney, Paulson picked up BofA preferred stock (one analyst suggested at $9) that he then converted into common, “pocketing a big profit in the process”. Interestingly, Carney adds, hedge fund Third Point is also thought to have picked up the preferred stock at 57 cents on the dollar and then converted it into common stock at $10.
Shares in BofA, which is the recipient of $45bn of government aid, closed on Wednesday at $15.93, up 8 cents. In after-hours trading, however, following the disclosure of Paulson’s purchase, BofA shares rose 3.3 per cent to $16.46, reports the FT.
Paulson – in his mega-”reflation bet” – has also been accumulating shares of other financial stocks, as the FT notes. In the second quarter, as we mentioned he bought 2m Goldman shares, but he also bought 7m shares in JPMorgan, 35m shares in Regions Financial, 17m shares in Capital One Financial, 12m in Marshall & Ilsley, 5m shares of Fifth Third, and smaller amounts of State Street and Suntrust. He was also part of the consortium of financiers who acquired IndyMac several months ago.
Paulson’s new-found interest in financial stocks comes on the heels of a profitable short bet last year against the Royal Bank of Scotland, from which he is said to have made more than £300m. According to earlier regulatory filings, Paulson made a series of bets on bank stocks in late 2008, buying 83.5m shares of Wachovia while it was under agreement to be bought by Wells Fargo, and 15m shares of Merrill Lynch, which had reached an agreement to be acquired by BofA.As for other purchases in Paulson’s Q2 shopping spree, as GuruFocus notes: Paulson made a killing in 2008 by shorting. But over long term, he made most of the money through merger arbitrage. Take a look at his portfolio, you can see a lot of those: Sun Microsystems, Pepsi Bottling, Wyeth, ScheringPlough Corp etc. He bought a lot of stocks in the second quarter. John Paulson owns 38 stocks with a total value of $17.1 billion.
Click here for GuruFocus’s Paulson Q2 portfolio update.
It’s worth noting, as the Pragmatic Capitalist adds, that the equity portion of the Paulson portfolio is heavily weighted towards three sectors: gold, financials and healthcare:He is making three heavy bets here on very different macro themes.The gold and healthcare plays appear to be a form of cautious optimism in the reflation trade. The gold trade also has an element of inflation and/or caution. The banks, however, are a pure & speculative play on recovery.
Go, John…
Related links:
Paulson stocks up on banks, drugs, gold – Reuters
Paulson hedge fund buys banks that lost value in credit crisis - Bloomberg