A few weeks ago, Omega Advisors CEO Leon Cooperman appeared on CNBC to elucidate the market for investors. The value investor who looks to “pay less for more,” suggested several stocks to consider trading at attractive valuations in a “fairly valued” market. He says this valuation status has driven his firm to start looking at “red chip” rather than “blue chip” companies, which he defines as “not the major companies, but companies that have a good story, good valuation, and we have to be patient.”
Sprint shares have gained 19% since July when the company was acquired by Japanese telecom SoftBank, compared to just over 7% for the S&P 500, and are trading at $6.60 on Monday afternoon.
Cooperman increased his stake in Sprint by more than 45% to 95,112,117 shares in the second quarter. Other gurus that bought or increased their shares of Sprint include Paul Tudor Jones, Steven Cohen and Louis Moore Bacon. Ken Fisher and David Einhorn sold out.
Sprint is trading at a P/B ratio of 5.08 and P/S of 0.55.
Sprint reported a net loss in the first two quarter of 2013 – $643 million in the first quarter and $1.6 billion in the second quarter. A substantial portion of the loss in the second quarter was due to costs associated with closing down its Nextel network over the past year. Sprint’s total wireless subscribers at the end of the first period also declined year over year to 55,211, and again in the second quarter to 53,588.
“If you look at the proper profit margins for this business, the growth in revenues – we think Sprint could probably in two years earn over $1 a share; the stock is $6,” Cooperman said.
The company has earned profit margins over 40% across the past decade, though they have been in decline. Operating margins and net margins have predominantly been in the negatives since 2007.
Revenue per share has declined at an annual rate of 1.1% over the past five years.
American International Group (AIG)
AIG shares year to date have gained more than 46% and trade around $51.43 Monday afternoon, still less than book value.
AIG has a P/E of 29, P/B of 0.8 and P/S of 1.21, which is near a five-year high.
Cooperman in the second quarter sold about 25% of his stake in the company, reducing for the third consecutive quarter, and leaving his holding with 5,814,100 shares.
Gurus who entered or added to positions in the second quarter include Joel Greenblatt and Ray Dalio. George Soros, David Tepper and Julian Robertson among others sold shares and Ken Heebner, John Keeley and Steve Mandel all sold out.
In the first two quarters of the year, AIG reported increased year-over-year book value, and sequential growth in net income which reached $2.7 billion for the second quarter. Net premiums written also increased sequentially to $9.26 billion, and revenue per share grew for the third consecutive quarter to $11.68.
KKR Financial (KFN)
KKR shares year to date declined almost 5% to trade around $10 on Monday afternoon.
Cooperman in the second quarter increased his shares owned of the company by almost 7%, to hold 14,762,185 at quarter end. The other gurus with a position in the stock are David Dreman, Chuck Royce and Jim Simons.
KKR is a global investment firm with a $2.06 billion market cap. It trades with a P/E of 5.5, P/B of 0.8 – which is near a three-year low – and P/S of 4.2.
Over this year, KKR has experienced three consecutive quarters of net income declines to $33 million and revenues declines to $128.7 million in the third quarter. It also had marginal book value increases each quarter to $10.42.
“Our results reflect the environment in which KFN is operating, as yields continue to compress and many of our legacy CLOs continue to amortize,” said Craig J. Farr, CEO of KFN.
KKR also has a dividend yield of 8.3% and paid a dividend of $0.22 per common share in the third quarter. The company has increased its annual dividend payout per share for the past three consecutive years after instating it in 2010 following a cut to $0.05 in 2009.