Should You Be Concerned About Billionaire Leon Cooperman’s Top Holdings?

These stocks are relatively larger and less risky than an average S&P 500 constituent. As a result, Cooperman’s large-cap picks generated a monthly alpha of 5 basis points during this 14-year period. Nevertheless, we don’t think it is a good idea to follow Cooperman into Actavis plc (NYSE:ACT), Citigroup Inc (NYSE:C), American International Group Inc (NYSE:AIG), or Sirius XM Holdings Inc. (NASDAQ:SIRI), based on the results of our back tests. Cooperman’s top 5 large-cap picks actually performed worse than his other large-cap picks during this period. They lost an average of 7 basis points per month and underperformed the S&P 500 Index by an average of nearly 5 percentage points per year.

We don’t think hedge funds have an edge over other institutional investors such as mutual funds or retail investors who pretty much blindly invest in the stock market. Large-cap stocks are extensively covered by analysts and risk profiles are well understood by the market participants. What does Leon Cooperman know about Actavis plc, Citigroup Inc, or American International Group Inc that other investors don’t know or misunderstand? We report on these positions but we don’t take Cooperman’s moves seriously.

On the other hand smaller stocks aren’t well followed and are sometimes misunderstood by market participants. For instance an equal weighted portfolio of Cooperman’s mid-cap picks (stocks that have market caps between $5 billion and $10 billion) managed to outperform the S&P 500 Total Return index by an average of 10 basis points per month between 1999 and 2012. Navient Corp (NASDAQ:NAVI) fits this description. Navient also counts Venor Capital, Zenit Asset Management, and D E Shaw among its investors. If you are planning to scour Cooperman’s portfolio for good investment ideas you should start looking into his smaller cap picks.

Disclosure: Long C.