Billionaire Lee Cooperman’s Top 5 Stock Picks

3. Alphabet Inc (NYSE:GOOG)

The parent company of Google, Alphabet ranks 2nd on our list of billionaire Lee Cooperman’s top 10 stock picks. The fund owns 60,000 shares  of the company, worth $105 million, at the end of December 2020. GOOG accounts for 7.57% of the Omega Advisors’ overall portfolio. In the fourth quarter, Alphabet’s revenue grew 23% on an annualized basis. Ads revenue in the period jumped 22% to $46.20 billion. The results were helped by a sharp increase in spending by advertisers who had pulled back from the market amid the coronavirus crisis.

Kinsman Oak Capital Parterns, Inc. generated a return of 6.4% for the fourth quarter and mentioned GOOG in its  Q4  2020 investor letter:

“Our view on Alphabet (GOOG) may be somewhat controversial. The bear case for GOOG boils down to antitrust risk and valuation. Our thesis is predicated on the belief that real earnings power, especially for Alphabet, is higher than it appears on the surface. At first glance, Alphabet’s P/E appears to be 30.2x. Adjusting for net cash brings this down to 27.9x. Alphabet’s “Other Bets” segment generates de minimis revenues but reduces operating income by 13%. Adjusting for that (and assigning zero value to a segment that includes Waymo, Nest, and Verily) brings the multiple to 24.7x versus the S&P 500 trading at 22.3x.

Alphabet, at a 10% premium to the S&P 500, is one of the biggest relative value bargains hiding in plain sight we have seen. Alphabet has a much deeper moat, better margin profile, less capex requirements, and faster growth profile than the average company within the index (estimated 18% CAGR for the next two years versus 8% for the S&P 500).

Pushing the envelope, Alphabet’s multiple would be lower than the overall market if the company treated stock-based compensation as dilution and/or if research & development was capitalized instead of expensed. Internally we use a more detailed sum-of-the-parts analysis to more closely approximate intrinsic value. Further, Waymo provides significant upside optionality, especially if you believe Tesla’s “full self driving” technology justifies a large portion of its market cap.

In short, we believe the obfuscated earnings power makes Alphabet appears more expensive than it really is. After adjusting for factors like “Other Bets” in Alphabet’s case or net cash, stock-based compensation, and research and development treatment, it becomes clear that investors are being adequately compensated for the associated antitrust and regulatory risk.”

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