In this article we will share billionaire Leon Cooperman’s 10 cheap stock picks.
Billionaire Leon “Lee” Cooperman is in the news after continuously grilling the GameStop speculation that is currently rattling the U.S. markets. Son of a plumber, Cooperman grew up in a Jewish family in South Bronx, New York, and was the first one from his family to get a college degree. Cooperman is consistently warning that the GameStop episode endgame would not be pretty, especially for the speculators who are betting on GameStop. In a Feb. 1 article on CNBC, the 77-year-old reiterated his fears and warned against speculating without any inherent value or investment thesis.
Destined to Lose Money
Cooperman said that he hopes GameStop speculators understand that the current price of the stock “bears no relationship to the fundamental value” of the business. He said that in the end “water seeks its own level” and unless the GME speculators are excellent traders, they are “destined to lose money.”
Cooperman also said that the GameStop episode is being framed as a battle between the wealthy and the poor, which he believes is a misrepresentation of reality. He also said that the Fed’s policy of zero interest rate and loose fiscal policies are partially responsible for what’s happening in the financial markets.
Cooperman is a value investor, with a keen eye for undervalued stocks with solid business. He once said:
“We‘re trying to look for the straw hats in the winter. In the winter, people don‘t buy straw hats so they‘re on sale. We‘re basically looking for what‘s on sale.”
Here’s what Cooperman said about the GameStop episode a few days ago:
“We have been pulling forward demand, the outlook longer term is more questionable. I understand what’s going on in the market. This is not going to end well, and the bigger question is when does it end?”
GameStop Corp. (NYSE: GME) is a struggling video game merchandise retailer that was badly hit by the pandemic. The company currently has a $22.6 billion market capitalization, it delivered a massive 1,625.05% return last month up-to-date and a mind-blowing 8,363.54% return in the past 12 months alone. Just recently, an army of amateur investors used Reddit’s platform to disseminate the information to buy GameStop shares because for them, GME is deeply undervalued and what happened next is history. They were successful in pushing the share price of GameStop at higher levels, beating the institutional investors who bet against the company. It is absolutely clear that there are a number of hedge funds who shorted the company, sold millions of its shares, and are now facing tons of losses that prompted them to buy the shares back to stop the bleeding. As a result, this buying created additional demand that pushed the prices to higher highs or what we call a short squeeze.
Leon Cooperman of Omega Advisors
Lee Cooperman said that this kind of situation like in GameStop will ‘end in tears’ and it seems pretty obvious that a lot of tears are being felt by the hedge fund community that is caused by the market manipulation from novice market participants. It’s as if the message the retail traders are implying is that, “We’re sick and tired of watching hedge funds make all of this money, and whenever they don’t get the money, the government bails them out.”. Cooperman responded by saying that the government is the rightful steward who is responsible in keeping the economy in shape and in good condition. “In 2008, Ben Bernanke (14th Chairman of the Federal Reserve) figured out he had to rescue the economy that was going down the toilet. He’s figured out the best way to rescue the economy is to create wealth because wealth leads to consumption and the best way to create wealth is get the stock market up,” said Cooperman in a CNBC interview while adding, the problem that comes along with it is that 80% of the stock is owned by only 20% of the people and this resulted to a negative real return environment for savings, therefore, the public gets no reward for being prudent and for saving money.
“I did vote for President Biden because I felt I voted my values, not my pocketbook but if you listen to it, Mr. President Biden has to say basically they’re going to raise taxes on the individuals and raise taxes on corporations”. Lee Cooperman emphasized that raising the capital gains tax rate is not going to be user-friendly and will be a huge blow to any investor. “I don’t know if they’re going after hedge funds per se, but there was definitely some of that,” he marked.
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“I’ve been doing this for 55 years. I can tell you, the short-sellers, generally speaking, are more knowledgeable than the long players because they understand if you’re wrong and along as it goes down it becomes less of a problem in your portfolio,” stated Cooperman, talking about how knowledgeable the experienced short-seller investors are, and how well researched are their short positions. “If you’re wrong on a short, it becomes a bigger problem in your portfolio so they tend to be very careful. They’re very smart and if I had a guest, I’ve never spoken to him but Gabe Plotkin (Founder of Melvin Capital) would have turned out to be right in his view of GameStop”.
Cooperman concluded by saying that, “The only surprise to me to be honest with you in GameStop is why they have not used this ridiculous price to raise some cheap capital as Elon Musk and Tesla.”
The GameStop scandal sheds light on a deeper problem. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Irrespective of the GME endgame, Cooperman’s calls are worth paying attention to as he is a master at spotting undervalued stocks. Let’s take at look at some of the cheapest stocks in Leon Cooperman’s portfolio. We selected only those stocks in the billionaire’s portfolio which have trailing PE ratios (TTM) or forward PE ratios of 16 or less.
10. Falcon Minerals Corp (NASDAQ: FLMN)
Forward P/E: 15.85
Falcon Minerals, formerly known as Osprey Energy Acquisition, operates in oil, gas and minerals space. The company owns mineral rights positions in the core-of-the-core of the Eagle Ford Shale. It owns interests over 251,000 gross unit acres in the Eagle Ford and Austin Chalk in Karnes County, DeWitt County, and Gonzales County Texas. Falcon Minerals has over 3,000 drilling locations.
Leon Cooperman upped his hold in the company by 36% in the third quarter. His fund now owns 945,648 shares of the company, worth $2.31 million.
PE Ratio (TTM): 15.2
Connecticut-based Cigna is one of the major insurers in the country, offering medical, dental, disability, life and accident insurance services. The company offers Medicare and Medicaid products and health, life and accident insurance coverage. Leon Cooperman’s hedge fund cut its position in the company by 13% in the third quarter, ending the period with 425,000 shares, worth $71.99 million.
Overall, 62 hedge funds in Insider Monkey’s database held positions in Cigna entering the fourth quarter, down from 72 a quarter earlier. Avenir Capital talked about Cigna in its 2020 Q3 investor letter:
“The only material detractor for the quarter was Cigna, a U.S. healthcare stock, which declined 9.7% as the U.S. moved closer to the election and Joe Biden’s chances of winning the presidency increased, along with the possibility of the Democrats gaining control of the senate. Investors sold U.S. healthcare stocks due to increased fears of unfavourable policy change and following a well-established pattern of healthcare stocks underperforming leading up to an election and then materially outperforming after the election. While we generally don’t comment on current quarter events in these letters, given the timing and significance of the U.S. election, it is, perhaps, worth pointing out that Cigna’s share price jumped 15% the day after the election. We think the probability of dramatically unfavourable policy outcomes is low and prefer to hold this proven compounder through the volatility.”
8. Arbor Realty Trust Inc (NYSE: ABR)
PE Ratio (TTM): 15.27
Arbor Realty Trust is a REIT which invests in portfolio of structured finance assets in the multifamily and commercial real estate markets. It primarily deals in bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity. Omega Advisors cut their stake in the company by 4% in the third quarter, entering the fourth quarter with 2.33 million shares of the company, worth $26.72 million.
Overall, 11 hedge funds reported owning stakes in Arbor Realty Trust as of the end of the third quarter, up from 6 funds a quarter earlier.
7. Citigroup Inc (NYSE: C)
PE Ratio (TTM) 11.84
New York-based Citigroup is one of the largest banking institutions in the U.S. The company ranks 31 on the Fortune 500 list. Leon Cooperman’s fund owns 370,000 shares of Citigroup as of the end of the third quarter, worth $15.95 million. The smart money is collectively bullish on the company, as 91 hedge funds tracked by Insider Monkey held $5.5 billion worth of Citigroup shares as of the end of the third quarter.
In January, Citigroup beat Q4 earnings estimates, helped by $1.5 billion release of credit reserves and strong results in its consumer banking unit. Oakmark Select Fund recently commented on Citigroup in its investor letter:
“Citigroup was our largest detractor for the period due to Covid-19-related concerns that have hurt the entire financial sector, as well as a handful of Citigroup-specific headlines that amplified near-term uncertainty. We believe that investors’ short-term focus can cause them to miss the bigger picture. The company has remained profitable throughout the Covid-19 crisis to date. It continues to operate with significant excess capital relative to regulatory minimums, even as it has added more than $10.5B to credit reserves year to date. We believe the company is proving its resilience during a real-life stress test. Yet, despite this positive early evidence, Citigroup currently trades at only 60% of tangible book value and slightly over 5x 2019 earnings per share. Given that we think the company’s normalized earnings power is greater than what it achieved in 2019, we find these valuation metrics especially attractive. As we move beyond the pandemic, we think investors’ focus will shift to the underlying quality of the business and they will value the resilience Citigroup demonstrated during this crisis.”
6. Enterprise Products Partners L.P. (NYSE: EPD)
PE Ratio (TTM): 10.08
Enterprise Products ranks 101 in the Fortune 500 list. The midstream natural gas and crude oil pipeline company acquired GulfTerra in September 2004. The company’s segments include NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services and Petrochemical & Refined Products Services.
As of the end of the third quarter, 30 hedge funds in Insider Monkey’s database held long positions in Enterprise Products. The total value of these stakes is $178.19 million.
Omega Advisors initiated a new position in Enterprise Products in the third quarter, buying 500,000 shares, worth $7.9 million.
Ellington Financial acquires and manages mortgage-related and other financial assets. The company invests in residential and commercial mortgage-backed securities, residential and commercial mortgage loans, consumer loans and asset-backed securities. A total of 11 hedge funds tracked by Insider Monkey held stakes in Ellington Financial entering the fourth quarter. Omega Advisors owns 760,000 shares of the company, worth $9.32 million.
4. First Eagle Alternative Capital BDC, Inc. (NASDAQ: FCRD)
Forward P/E: 8.32
First Eagle operates lending and credit investment business, with $21 billion of assets under management and advisement, as of September 30, 2020. As of the end of the third quarter, 6 hedge funds tracked by Insider Monkey held stakes in First Eagle. The total worth of these positions is $9.3 million.
The stock was a new arrival in Omega Advisors portfolio, as the fund bought 2.86 million shares of the company, worth $7.1 million.
PE Ratio (TTM) 7.99
Athene Holding Ltd (NYSE: ATH) is a Bermuda-based retirement services company that offers retirement savings products. Leon Cooperman’s hedge fund loaded up on Athene Holding in the third quarter, buying a new stake in the company worth $33.45 million. In December 2020, Athene Holding shares gained value after General Electric (NYSE:GE) agreed to transfer $1.7 billion in pension obligations to the retirement services company. Athene will provide annuity benefits for about 70,000 retirees who are currently receiving benefits from GE’s pension plan.
As of the end of the third quarter, 31 hedge funds tracked by Insider Monkey held stakes in Athene. Lakewood Capital talked about ATH in its 2020 Q2 investor letter:
“We previously discussed our long position in Athene Holding in our third quarter 2019 letter, and the stock performed well over the next several months as management continued to execute on its competitively advantaged strategy in retirement services. However, Athene’s stock was punished by the pandemic-related sell-off, and at 60% of tangible book value, we believe it has the potential to double over the next 18 months.
While investors are justifiably concerned about future credit impairments, we think they are unlikely to amount to more than 10% of its tangible book value of $10 billion. Given that Athene typically generates pre-tax profits of nearly $1.5 billion, the company should still grow tangible book value in 2020. Athene has also capitalized on the significant disruption in the marketplace to improve its competitive position and increase its return profile. In June, the company, along with its co-investment vehicle ACRA, announced an accretive transaction with Prudential’s Jackson business, whereby it would reinsure $27 billion of fixed annuity and fixed indexed annuity reserves and acquire an 11% stake in Jackson’s remaining business. This deal will increase Athene’s earnings by nearly 10% and add 100bps to overall returns on equity by 2022. We estimate that Athene is paying just 3x pro forma earnings for this business, underscoring its unique ability to acquire complex assets at incredibly attractive prices. Furthermore, Athene continues to have significant dry powder to do additional deals, comprised of over $3 billion of excess equity capital on its balance sheet and nearly $2 billion of excess third-party capital in ACRA.
We are also encouraged to see KKR (a previous Lakewood long) recently announce that it is acquiring Global Atlantic, an Athene competitor (that is more levered but generates similar returns on equity) for 1x tangible book value. Applying the same valuation to our estimate of Athene’s book value at the end of 2021 yields nearly 100% upside in the shares over the next 18 months. At that level, the shares would be trading at just 6x forward earnings.”
2. Gamco Investors Inc (NYSE: GBL)
PE Ratio (TTM): 7.71
Led by known billionaire hedge fund manager Mario Gabelli, Gamco Investors offers investment advice and brokerage services to mutual funds, institutional and investors. Omega Advisors made no change to its position in the company in the third quarter, with 8,600 shares, worth $100,000. Just 6 hedge funds tracked by Insider Monkey held stakes in Gamco Investors entering the fourth quarter.
On Jan.22, Gamco said it expects Q4 EPS to fall in the range of $0.69 to $0.73 versus $0.91 reported in the year ago quarter.
1. Mr. Cooper Group Inc. (NASDAQ: COOP)
PE Ratio (TTM): 4.50
Mr. Cooper Group Inc is one of the largest home loan service providers. The company offers several lending products, services and technologies. In November 2020, Mr. Cooper shares rallied after Leon Cooperman recommended the stock in a TV interview. Omega Advisors upped its stake in the company by 13% in the third quarter, ending the period with 4.65 million shares of the company, worth $103.81 million.
Diamond Hill Capital stood by its COOP investment despite large losses during the March crash. Here is what they said at the time:
“Mortgage servicing company Mr. Cooper Group, Inc. underperformed amid fears over advance payments mortgage servicers are required to make to bondholders in the event of missed payments from borrowers. Investors worry that Federal programs encouraging borrowers impacted by the virus to delay mortgage payments will overwhelm the servicing industry’s ability to make payments to bondholders.”
COOP shares quadrupled since then. As of the end of the third quarter, 23 hedge funds out of the 816 tracked by Insider Monkey held stakes in the company. The net value of these stakes is $416.25 million.
Please also see Billionaire Cooperman’s Top 10 Stock Picks and 15 Best Undervalued Stocks To Buy Now.
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This article is originally published at Insider Monkey.
