Leon Cooperman (Trades, Portfolio) appeared on CNBC and made three main points: 10-year Treasuries at 3% are not a problem for the stock market, markets die in euphoria and FANG stocks mostly have reasonable valuations.
10-year Treasuries
There is a lot of talk about 10-year Treasuries now yielding in excess of 3%. This gives investors an alternative to the stock market in their fight against inflation. It makes sense that this could put some pressure on inflows into the stock market. Cooperman doesn't fear this. He thinks the stock market is still the right place to be. His analysts see better opportunities there compared to the 3% even though the market is called overvalued by some (yours truly included).
Markets die in euphoria
Cooperman looks at the S&P 500 and historically it averaged a multiple of 15x. The market multiple is currently about 17x. Interest rates are about half times the average. The market understands interest rates are below average. He does acknowledge that with interest rates this low you aren't supposed to make 15% in the stock market. This suggests he expects modest returns. This makes me wonder whether a modest return is worth the risk a - at a minimum - fully valued market poses. However, Cooperman believes barring some unforeseen event the stock market is going up.
"Markets die in euopharia. We are clealry in a phase of optimism but we aren't in an euphoria stage," he said.
FANG stocks
According to Cooperman, FANG stocks, with the exception of Amazon, have very reasonable valuations. The biggest risk is the government slapping them with regulation. He gives Facebook as an example. His analysts figure it will make $11 per share in earnings next year. The mean estimate by sell-side analysts being $9, that's a different view. It's aligned with the high end of the range of sell-side analysts.
Facebook is selling at 20x this year's earnings. That's just above the S&P 500's average of 17x. While Facebook can grow earnings at 20% per year versus 5% for the S&P 500. Facebook also has a good balance sheet. Cooperman has a buy order for more shares outstanding at $180.
The big risk is government regulation. Cooperman thinks the administration is pro-business and expects it to behave rationally, which mitigates that risk.
Below are the largest positions held by Cooperman. Notable with regard to this discussion are Alphabet (GOOG, Financial) (GOOGL, Financial) and Microsoft (MSFT, Financial).
I'm hoping the government is pro-business and more rational: Lee Cooperman from CNBC.
Disclosure: no positions.
