Here's What This 250% Gainer Is Buying

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At The Motley Fool, we understand that it often pays to zig when Wall Street zags, but that doesn't mean that we don't pay attention to what leading fund managers are buying and selling. And funds that aren't always in lockstep with the broader market can be a particularly valuable source of insight.

Every quarter, fund managers overseeing more than $100 million must disclose their quarter-end holdings publicly by filing Securities and Exchange Commission Form 13-F. The form lists all U.S.-traded securities the manager held at the end of the quarter. Although the form doesn't disclose the manager's short positions or the manager's intraquarter trades, it can shine a bright light on his or her "long" stock bets.

Q3 2011 update
Paulson & Co. was founded in 1994 by John Paulson. This hedge fund sponsor has specialized in merger arbitrage, among other things, profiting when one company buys or merges with another (or merely announces plans to do so). It has grown into one of the largest hedge fund companies in the world.

Is Paulson really worth paying attention to, though? Well... yeah. According to the folks at GuruFocus.com, Paulson gained about 250% in the first decade of this century, compared with just 16% for the S&P 500.

The total market value of Paulson & Co.'s disclosed equity holdings as of Sept. 30, 2011 -- the latest quarter for which data is available -- was $20.7 billion. The company's 10 largest positions and associated changes in portfolio weight as of Sept. 30, 2011 were:

SPDR Gold Trust (NYS: GLD)  -- reduced 35%.
AngloGold Ashanti (NYS: AU)  -- reduced 8%.
Anadarko Petroleum (NYS: APC)  -- reduced 15%.
Capital One Financial (NYS: COF)  -- increased 5%.
Transocean (NYS: RIG)  -- reduced 13%.
Citigroup (NYS: C)  -- reduced 25%.
Hartford Financial Services (NYS: HIG)  -- reduced 4%.
Wells Fargo (NYS: WFC)  -- reduced 29%.
SunTrust Banks (NYS: STI)  -- reduced 5%.
XL Group (NYS: XL)  -- reduced 16%.

During the quarter, Paulson also increased its position in Mylan, among others. Among the stocks that it reduced its exposure to were Hewlett-Packard (NYS: HPQ) and Family Dollar, while it sold out its entire position in companies such as NetApp and JPMorgan Chase.

The drop in gold may be due to a growing belief among some that gold's rapid ascent in recent years has been a bubble -- though, of course, others project continued growth. The reduction in Hewlett-Packard may puzzle some, as the stock seems very undervalued on many measures. But its board of directors has repelled many, too, with a variety of boneheaded moves.

Selected Q3 2011 commentary
Paulson & Co. has the majority of its assets in financials and basic materials stocks. Paulson loaded up on the financial sector after the credit crisis and has been gradually shrinking its share. Note that despite Paulson's sell-off of gold-related assets, its top two holdings are both tied to gold.

Here's where the firm has been winning and losing and making new bets:

Recent winner
Natural gas storage and transportation company Southern Union may not seem like a winner for Paulson, staying essentially flat over the quarter, but remember that it was a tough quarter overall, with the S&P 500 sinking by about 14%. Over the past year, the stock is up about 80%, mostly due to news that it's being bought out by Energy Transfer Equity. Southern Union has a four-star (out of five stars) rating at Motley Fool CAPS.

Recent loser
There were many losers in the quarter, such as Transocean, down about 25%. Keeping the stock suppressed to some degree is uncertainty over the price it will pay for its involvement in the huge Gulf oil spill. Its new association with another oil spill hasn't helped its cause, either. Still, the company has a five-star rating in Motley Fool CAPS.

New bets
One interesting new holding is InterDigital (NAS: IDCC) , which is drawing investors thanks to its solid revenue growth, much of which comes from licensing fees. It's been growing faster than rival Qualcomm (NAS: QCOM) , in fact, and some see it as a possible takeover target. InterDigital has a four-star rating at Motley Fool CAPS.

We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing. 13-F forms can be great places to find intriguing candidates for our portfolios.

Looking for promising investments? Here are "5 Stocks With Explosive Potential" and "4 Stocks as Cheap as They've Ever Been."

At the time this article was published LongtimeFoolcontributorSelena Maranjianowns shares of JPMorgan Chase and Qualcomm, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Qualcomm, Citigroup, Wells Fargo, Transocean, and JPMorgan Chase, and has created a covered strangle position on Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of InterDigital. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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