Leon Cooperman’s view on the market.
- Contrary to what the interviewer said, Leon Cooperman does not considers himself typically bullish, he likes to call it the way he and his associates see it at Omega Advisors. They are now basically on the optimistic side for various reasons.
o About 20 percent of stocks yield more than the 10 year government bonds, that is an unusual condition.
o The S&P is trading around 13 times earnings; the last 50 years the S&P averaged 15 times earnings.
o In the last 50 years, with the S&P averaging 15 times earnings, the 10 year bond yield averaged 6.67 percent, and it is currently 3 percent.
o When inflation has been low, like it is now, from 1 percent to 3 percent, the multiple in the market was 17 times.
- Mr. Cooperman thinks that the stock market understands that it is different this time, that the economy is going to come back more slowly. He considers this is all discounted.
- When you look at corporate America, everybody is pessimistic, but:
o International Paper (IP) launched a hostile bid for Temple Inland at $30.6/share with a 44 percent mark-up. The total purchasing price would be $3.3 billion. IP would not do a cash bid if they thought the business is deteriorating.
o A month ago, the CEO of Caterpillar stated that business abroad is booming while steadily improving in the U.S.
o Federal Express, raised its guidance.
o Not everything is positive about the market. The psychology of the players is very fragile.
o 2008 was a very transformative experience for most investors. They got crushed.
o In May, 2010 we had a flash crash that nobody understood. That scares people.
o People are redeeming out of mutual funds.
o We have long-term issues that we are not confronting; we are just pushing them out.
- The bottom line is whether the economy grows:
o If the economy grows, then we have a sound market, moderately undervalued. There is opportunity in that kind of environment.
o If the economy does not grow, Cooper thinks Omega Advisors can still make a lot of money; there is still a lot of value. When Cooper joined Goldman Sachs in 1967, the Dow floated around 1000 for decades and he managed to make a lot of money through stock picking. So, if there is not a recession and the market does not go anywhere, he believes they still can do very well by selecting stocks.
A basic methodology:
Mr. Cooperman is aware of the risks in the economy and is trying to control the overall exposure of the fund. They have more ideas than money.
- The first thing he does is look at the market: The S&P500 is around 13 times earnings, growing at about 6 percent – 7 percent a year, it yields around 2 percent in dividends, debt on the average S&P 500 company is 35 percent of capitalization.
- Thus, they search for companies that have: a lesser p/e ratio, higher growth and dividend yields.
- Apple (NASDAQ:AAPL). For an investor seeking growth, currently at 12 – 13 times earnings. Apple has $65 billion in cash and is doing nothing with it. The financial policies are serving to depress the stock.
- Citrix Systems (NASDAQ:CTXS). Citrix is important in the “cloud” computing area.
- Discovery Communications (NASDAQ:DISCA). In the media business, they are buying back a substantial amount of shares. There is a good growth outlook for this company.
- Teva Pharmaceutical Industries (NYSE:TEVA). Selling at less than 10 times earnings, this has been a really disappointing stock. The company is developing new products, growing internally and through some acquisitions. Teva generates several billions in free cash flow a year. With the aging population, health care is a growth area. Sometimes, companies that sell at depressed multiples remain so for many years. They are referred to as “value traps.” However, when an investor finds an undervalued stock he hopes the result will turn out right a lot more often than not.
- There are some stocks that have a decent and growing dividend yield, growing earnings and trading at about 12-13 times earnings like: ACE (ACE), CVS Caremark (CVS), Pacific Booker Minerals (PBM) and KKR Financial Holdings (NYSE:KFN).
- Omega Advisors owns 14 percent of KKR financial (NYSE:KFN). The stock yields about 6 percent. The book value is around $11 a share and is currently trading at around $9.75 a share. Cooper considers the stock to be worth somewhere between $11 - $12. They started buying at as low as $2.
- Omega Advisors holds every stock discussed in this article.
Dr. Leon G. Cooperman is the founder, chairman, CEO and president at Omega Advisors Inc. Mr. Cooperman worked for 25 years for Goldman, Sachs & Co. where he retired as General Partner, and CEO and president at Goldman Sachs Asset Management.
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Leon Cooperman on the markets