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Federico Flom
Federico Flom
Articles (110) 

Leon Cooperman Portfolio's Top 5 Holdings: SLM, APL, LINE, KFN, GLD

November 28, 2011 | About:

I saw Leon’s Cooperman conference at the Value Investing Congress. I will point to some of his thoughts from his speech, including some of the stocks he believes have the greatest upside potential.

Mr. Cooperman assumes the U.S. will remain in a slow growth environment, and will not go back into a recession. Cooperman cited Warren Buffett and Jeffrey Immelt of GE (GE), who have said the same thing. However, he noted that one out of every five employees in the country is either unemployed or underemployed.

Cooperman believes that 2011 is not going to be like 2008. He thinks the next crisis to hit us will be in public finance. Crises do not repeat, he says. The next crisis is often very different from the prior one. He does not envision another banking crisis as 2008.

He expect sane policies to prevail in Europe, and that Europe will be able to put a fence around the debt problems in Greece. We will have volatile months but in the end the ECB will pump liquidity as the Fed has been doing since 2008.

He mentioned names like Apple (AAPL), Qualcomm (QCOM), KKR Financial (KFN), Transocean (RIG) and E-Trade Financial (ETFC), Sallie Mae (NASDAQ:SLM) and Boston Scientific (BSX) as some of his top long ideas. He likes Apple because demand for the iPhone 4S is still incredibly strong.

He mentioned Transocean (RIG) because of the demand for deep water drilling. He believes that E-Trade (ETFC) is an increasingly solid investment as the company winds down its mortgage portfolio. He notes that Ken Griffin of Citadel Investments is on the board of E-Trade and it has been mentioned as a potential takeover play by one of the other discount brokers.

Finally, Cooperman, formerly of Goldman Sachs, believes that Sallie Mae could be worth $19 per share, and he likes Boston Scientific because the company has 20% free cash flow.

I analyzed Leon Cooperman's Omega Advisors' top holdings.


SLM Corp (NASDAQ:SLM): Sallie Mae's relationship with Uncle Sam was a blessing and a curse for the company. For many years, government guarantees allowed Sallie Mae to make nearly risk-free student loans and leverage them to the hilt, producing outsized returns for shareholders. However, such beneficence on the part of the government was not destined to last. In my opinion, Sallie Mae no longer benefits from any of the competitive advantages it garnered as the largest lender in the now-defunct Federal Family Education Loan Program (FFELP).

Sallie Mae historically originated and serviced loans made through the FFELP program, under an arrangement whereby the government guaranteed both minimum lending spreads and maximum loss rates to its private sector partners. Unfortunately for lenders, the FFELP program was recently eliminated in favor of direct loans to students from the government, eliminating a major source of profitability for the company. While Sallie Mae was one of the companies selected to service these loans, we don't believe that this endeavor will be nearly as profitable as its previous business model, though its scale may allow it to earn acceptable returns in this part of the business.

On the other hand, I am less positive on Sallie Mae's current lending business. Partly in preparation for the changes now occurring in the industry, Sallie Mae expanded its portfolio of private student loans--loans made to students whose need for financial assistance exceeds the amount available from government programs. These loans carry higher interest rates, but the potential for losses is much higher without the benefit of a government guarantee. Private student loans on the company's balance sheet grew by more than 350% between 2004 and 2008, as college costs increased and the public's willingness to take on debt expanded. However, the company's underwriting standards slipped, especially with respect to loans made to students at "nontraditional" schools--trade schools and other for-profit institutions, and these loans charged off at a rate several times of those to students at traditional schools. Furthermore, I think expanded funding for government grants and publicly funded student loans — along with students' increasing reluctance to take on large amounts of debt — will hurt demand for private loans. Considering the strength of the headwinds facing the company, I see few reasons for optimism with respect to Sallie Mae's prospects. On the other hand, management appears to agree, and recently announced that the company will resume returning capital to shareholders in the form of dividends and share repurchases.

It is great to be a “value” investor but this stock is cheap for a strong reason: it has a broken business model, no competitive moat and it is too dependent on regulation and rate conditions.


Atlas Pipeline (APL): through its subsidiaries, engages in gathering and processing natural gas. The stock has fallen recently and pushed its yield up to 6.7%. It has a P/E just under 3, but that was due largely to a one-time gain in the quarter ending March 2011, so I wouldn't focus on that value metric.

However, it trades at a comparatively cheap 1.4x P/S, 1.2x P/B, and respectable 22% return on equity. I don't see how the company can maintain their current juicy dividend when it amounts to approximately $105M annually and only approximately $60M coming in as FCF. I think fellow energy player Duke Energy is a better buy, trading at close to 1.1x P/B and a little lower 5.1% dividend yield, but one that is only at a 64% payout ratio indicating a much safer yield. Moreover, American Electric Power has similar valuations trading at 1.2x P/S, 1.25x P/B, and 5.0% dividend yield with only a 60% payout ratio. I see more value in those names.

Atlas Pipeline Partners is a limited partnership. The Atlas Pipeline provides natural gas gathering and treatment in the mid-continent regions of the U.S. APL has a dividend yield of 5.2% and a year to date return of 42%. Its dividend growth rate is 56%.


Linn Energy (LINE) LINE is organized as an MLP (master limited partnership) and is an independent oil and natural gas company, engaged in the development and acquisition of oil and gas properties in the United States. It has a market cap of $6.53 billion and an enterprise value of $9.66 billion. It mission is to acquire, and develop a growing portfolio of long life oil and natural gas assets and in the process maximize cash flow.

It has grown from a company that managed a handful of wells to a multi-billion-dollar entity that is among the top 20 independent US oil and natural gas development companies in the U.S. As of December 31, 2010, it had proved reserves of 2,597 billion cubic feet equivalent of oil and gas, and natural gas liquids, as well as operated 7,097 gross productive wells. LINE is set to increase production by roughly 30% in 2011, which is spectacular to say the least and clearly illustrates that this company is interested in delivering maximum value to its share holders. I think this company could be one of the best oil plays in the Industry.

In 2009 it delivered a 100 percent rate of return to unit holders. In the 3rd quarter Linn Energy announced that it purchased over 500,000 shares at an average price of $32.76. Insiders have also been adding to their positions. Director T. Jacobs purchased 30,000 shares in August (August 5 and August 8) at $32.76 to $34.00 a share. Director A. Walker purchased 4,000 shares at $31.76 to $32.85 a share on August 8. Officer Mark Ellis purchased 5,000 shares at $32.76 a share.


KKR Financial Holdings (KFN): I believe that KKR Financial is in a unique position at the moment in lieu of recent comments by Fed Chairman Bernanke. KFN's financial holdings consist mostly of corporate loans and high yielding collateralized loan obligations. The Fed has openly committed to low interest rates for an extended period of time, along with whispers of some form of QE3. This will continue to benefit the majority of KFN's bond holdings. As interest rates stay low, and based on the assumption LIBOR remains low as well, the bond portfolio's fair value will remain intact. I think KFN is very interesting from a dividend perspective. I think that Leon will adjust the position if the tone of the Fed changes, and interest rates are expected to rise.


SPDR Gold Trust (GLD): GLD’s recent behavior has frustrated some investors because the metal, a traditional safe haven, has at times fallen with other risky assets such as stocks, The Wall Street Journal reported, “Indeed, some significant shocks to financial markets have encouraged investors to sell gold to maintain their cash cushion and cover margin commitments,” the article noted.

“This relationship with equities appears to be more ensconced when there is a widespread need to raise cash. But that should be only likely to happen when equity-market losses are at their most severe,” HSBC chief commodities analyst James Steel said in the WSJ story. And even when gold falls in tandem with risk assets, “it doesn’t mean investors have given up on gold. It just means the currency markets are trumping gold’s safe-haven qualities.” In fact, Bloomberg’s latest weekly survey revealed gold traders and analysts are the most bullish since 2004.

About the author:

Federico Flom
Equity Research Analyst

Rating: 3.7/5 (6 votes)


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