McMoRan Exploration (MMR) And 4 Other Key Stock Picks from Leon Cooperman

Compared to their larger peers, small and mid-cap stocks don’t get as much attention in the financial world. Understandably, then, we can expect hedge funds and other top-tier investment vehicles to take advantage of this information inefficiency; we’ve determined that the most popular small-cap stocks among hedge funds can earn about 120 basis points of alpha per month.

At Insider Monkey, we started publishing a quarterly newsletter at the end of August, and since then (through December) this strategy returned 14.3% vs. 2.1% for the S&P 500 index (learn more about our small-cap strategy).

Here are five small-cap stocks that billionaire Leon Cooperman’s Omega Advisors reported owning on its most recent 13F (see the full list of Cooperman’s stock picks). Market capitalizations are between $250 million and $2 billion.

Cooperman’s top small-cap stock pick is Atlas Pipeline Partners, L.P. (NYSE:APL). Atlas is also Omega’s 6th largest 13F holding and makes up 3.4% of the firm’s 13F portfolio. This processor of natural gas pays a dividend yielding 7%, making it a solid income play. The majority of gas processed by Atlas Pipeline in the Appalachian Basin is from wells operated by Atlas Energy Resources.

OMEGA ADVISORSAnother one of Cooperman’s top small-cap picks, its third largest, is Atlas Energy LP (NYSE:ATLS). Atlas Energy is an independent developer and producer of natural gas and oil. In a CNBC interview on January 2nd, Cooperman gave a shout out to both of his Atlas holdings saying “we like some of the energy companies Halliburton, Atlas Energy and Atlas Pipeline.”

Thanks to the December 2012 close of its Cardinal Midstream acquisition, Atlas Pipeline now expects to generate EBITDA of $335 million (mid-range) in 2013, well above its $164 million EBITDA over the trailing twelve months. This boost in earnings and cash generation could also help boost its dividend (currently a $123 million annual payout) or allow for strategic acquisitions.

Atlas Energy, meanwhile, gathers natural gas in the Appalachia and Mid-Continent regions. The natural gas company recently announced expectations that will put 2013 production 50% above annualized 3Q 2012 levels. Atlas Energy pays a dividend yield (3%) less than half that of its transport partner Atlas Pipeline.

Both companies trade below other major oil and gas companies, with Atlas Energy at 1.3x sales and Atlas Pipeline at 1.9x sales, compared to El Paso Pipeline Partners (5.7x) and Kinder Morgan Energy Partners (3.4x). Likewise, each represents bets on strong expected demand for natural gas over the long-term.

KKR Financial Holdings LLC (NYSE:KFN), meanwhile, pays a 7.7% dividend yield on a 30% payout of earnings. KKR Financial is a former REIT that converted to an LLC in early 2012 when it sold off a controlling interest in a real estate subsidiary to an investment firm in an effort to raise cash. Cooperman also owns KKR Financial’s parent company KKR & Co., which is his 10th largest 13F holding.

The investment company has grown cash flow, where trailing twelve-month funds from operations is $350 million, compared to $320 million for FY2011. The stock trades at a P/B of 1.1, far below its parent company KKR & Co., which trades at 2.1x book. Billionaire Jim Simons upped his stake by 20% during 3Q (check out Jim Simons’ big bets).

Who’s the best of the rest?

McMoRan Exploration Co (NYSE:MMR) saw its stock up 80% in one day back in December 2012 following the announcement that Freeport-McMoRan would acquire the oil and gas exploration company. The acquisition of McMoRan is for $3.4 billion, or $2.1 billion net of the 36% of McMoRan that Freeport and Plains Exploration already owned.

McMoRan explores and produces oil and natural gas via shallow waters in the Gulf of Mexico and through onshore properties along the Gulf Coast. After being integrated into Freeport, McMoRan Exploration will be part of a U.S.-based natural resources company with oil and gas resources and metals mining operations. Billionaire T. Boone Pickens is one of the top-name investors in McMoRan Exploration as of his last 13F filing with the SEC (check out T. Boone Pickens’ top picks).

Atlas Resource Partners (NYSE:ARP) was Cooperman’s fifth largest small-cap holding on his last 13F. Atlas Resource is an oil and natural gas E&P master limited partnership (MLP), with most of its properties in the Barnett Shale and Appalachia regions of the U.S. Since going public last February, shares of ARP have only rewarded their original investors, but someone buying in six months ago–let’s say–would have lost close to 20% of their investment.
The obviously attractive aspect of this MLP is its 7.8% dividend yield, but it’s worth noting that the sell-side is expecting earnings to increase sixfold by the end of this year. Much of this growth is expected to come from Atlas Resource’s acquisition of DTE Gas Resources for $255 million, which boosts the company’s presence in the Fort Worth basin (North Texas). Long-term earnings growth is expected to average 10% a year over the next half-decade, pairing nice appreciative potential with ARP’s solid dividend payout.

Read more related coverage:

Billionaire Cooperman’s High Upside Potential Picks

Leon Cooperman Thinks Freeport-McMoRan Has It Right

Billionaire Cooperman’s Cheap Stock Picks

Marshall Hargrave has no positions in any of the stocks listed.