Lee Cooperman Says Market is Fairly Valued, Talks Some of His Positions

Lee Cooperman, founder of hedge fund Omega Advisors sat down with CNBC this morning to share his thoughts on the market.

Is the Market Fairly Valued?

"Bernanke's told us everyday since 2009 that he wants higher inflation, more economic growth, lower unemployment,  he wants to create high stock prices to create wealth, to create consumption ... you have to ask yourself as a money manager: has he gotten the market to a zone of overvaluation?"

Cooperman thinks the market is now fairly valued and he thinks every bull market ends at overvaluation.  He concluded that, "So the market's still ok, but it's not a bargain anymore."


On Stocks With Yield

He says he has around 90 holdings and touched on  how investors are looking for yield, so he highlighted some of his positions that fit this mold:

- KKR Financial (KFN): 7.4% yield, growing 5% a year
- Chimera (CIM): accounting issues that he thinks will be resolved this year
- Atlas Pipeline (APL): 7% yield, growing
- Linn Energy (LINE): good yield and growing
- Transcoean (RIG): 4.2% yield and notes Carl Icahn's presence in the name as well

He made an interesting comment on yield as well, saying: "Almost half the S&P 500 right now yield more than bonds."


Growth Stocks He Likes

Cooperman also rattled off some of the stocks he likes that fit under the growth category:  Express Scripts (ESRX), Google (GOOG), and Qualcomm (QCOM).


On Short Selling

Cooperman was asked about Herbalife (HLF) and short selling in general.  He does not have a position in the company but made these comments about shorting: "It's not a wise thing to publicize your short position, and I would not publicize being short 20% of a company."

He also went on to say: "I have no problem with short selling, I think short selling adds some discipline to the market.


Embedded below are the videos of Cooperman's interview:

Video 1


Video 2



Video 3


We've published the rest of Omega's portfolio in the new issue of our Hedge Fund Wisdom newsletter.

Notes From Invest For Kids Chicago: Lasry, Perry, Cooperman, Zell & More

Yesterday at Invest For Kids Chicago, numerous high profile hedge fund managers shared their latest investment ideas. The event had 800 attendees and raised $1.1 million (100% of the proceeds went to charities benefiting children). Please click the links below to view notes on each speaker's presentation:


Invest For Kids Chicago Notes:


Marc Lasry (Avenue Capital): Long General Motors & Hovnanian Bonds


Richard Perry (Perry Capital): GSE Junior Preferred Securities & RBS Tier 1 Securities


Leon Cooperman (Omega Advisors): Charming Shoppes (CHRS), KKR Financial (KFN), E*Trade Financial (ETFC)


Sam Zell (Equity Group Investments): Brazil's Investment Opportunity


Barry Rosenstein (JANA Partners): long McGraw Hill (MHP)


Thomas Russo (Gardner Russo & Gardner): Look abroad for opportunities, Nestle


Michael Milken (Milken Institute): Thoughts on Capital Markets


John Keeley (Keeley Asset Management): ITT Corp (ITT)


Barry Sternlicht (Starwood Capital Group): Likes Lowe's, Toll Brothers, NVR


Michael Elrad (GEM Realty Capital): Long Macerich (MAC)



For more of our coverage of the latest investment conferences, be sure to also head to notes & presentations from the Value Investing Congress.

Leon Cooperman: Long Charming Shoppes, KFN & ETFC ~ Invest For Kids Chicago Notes

At Invest For Kids Chicago yesterday, Leon Cooperman of Omega Advisors gave a presentation on going long Charming Shoppes (CHRS), KKR Financial (KFN), and E*Trade Financial (ETFC).

Be sure to check out all notes from Invest For Kids Chicago where numerous high profile hedge fund managers shared their latest investment ideas.


Long Various Equities

Cooperman previously worked at Goldman Sachs for 25 years and made money in bottom-up stockpicking even when the market did nothing during the first 10 years of his career. He points out that currently everything in the markets is correlated and eventually this will change in time.

He agrees with Marc Lasry that we'll see low growth (1% GDP) and no double-dip recession. In order to dent unemployment, he argues we need to see 3% GDP growth.

Regarding the markets, Cooperman says that "people are light risk and that was why October was up so strong." He believes the market is discounting very conservative set of expectations and that the ECB will do what it takes to solve the Euro crisis. He believes there is no chance of a repeat of 2008.

Cooperman continues to preach that stocks are the best house in the neighborhood. This is the same message he presented at the Value Investing Congress. In particular, he likes three names:

Charming Shoppes (CHRS) - He likes the Layne Bryant division which services a niche of large women's apparel. He thinks the division is worth $700 million while the company has $227 million in cash and $140 million in debt and says it's probably worth 2x.

KKR Financial (KFN) - He likes the debt management arm of KKR as the 9% dividend is 2x covered by earnings. You get a 5-6% return plus the 9% dividend he says.

E*Trade Financial (ETFC) - He continues to like the improvement in the company's mortgage portfolio after their horrible foray into the market went so poorly years ago.

Additionally, Cooperman mentioned he likes the following stocks as well: Apple (AAPL), Boston Scientific (BSX), SLM (SLM), and Energy XXI (EXXI). For more from this manager, head to Cooperman's presentation from the Value Investing Congress here.


You can view full notes from Invest For Kids Chicago here.

Omega Advisors' Leon Cooperman Likes Apple, Boston Scientific, KKR Financial, & Sallie Mae

At the Delivering Alpha conference, hedge fund founder Leon Cooperman of $6 billion Omega Advisors sat down with Maria Bartiromo to talk about the markets and what stocks he likes.

While Cooperman feels the market will be higher by the end of the year, he said that on a short-term tactical approach, he's found that hedge funds have low exposure. We've highlighted this as Dan Loeb's Third Point had reduced exposure for four consecutive months.

Cooperman thinks the fact that investors are underinvested could be a catalyst as money flows back into stocks and his focus is on a nine to twelve month timeframe. As to where the hedge fund manager is seeing value, he points to:

- Apple (AAPL): He says you can buy it at 10x next year's earnings.

- Boston Scientific (BSX): It generates over $1 per share in free cashflow annually (a 15% free cashflow yield) as the company looks to use that cash to buyback 10% of the company.

- KKR Financial (KFN): The stock yields over 9%, sells at a discount to book value, and the dividend is covered twice by earnings. He expects the yield to even go higher.

- Sallie Mae (SLM): Cooperman says that the $13 stock will earn $1.90 next year and he says the assets are worth $19-20.


In order to be bullish on equities (which he is), Cooperman says you have to invest under four assumptions:

1. The US is not like Japan and we will have a growing economy

2. The ECB will step up for European financial institutions

3. The President softens his anti-wealth, anti-business stance

4. Stability in the Middle East


Embedded below is the video of Leon Cooperman's interview from the Delivering Alpha conference:



We also detailed Leon Cooperman's appearance on the hedge fund best ideas panel at the conference as well. He will also be presenting his latest investment ideas at the Value Investing Congress.

Analysis of Tetragon Financial Group (TFG): Excerpt From Our Newsletter

The following is an excerpt from the current issue of our Hedge Fund Wisdom newsletter (click here for a free sample). It provides updates on what top hedge funds are buying/selling and the investment thesis behind their picks:

Craig Nerenberg from Brenner West Capital pitched Tetragon Financial Group (TFG) at the Harbor Investment Conference on February 3rd as a top idea for 2011. TFG is a classic discount to net asset value (NAV) idea coupled with tailwinds that will continue to grow NAV, at least in the near term.

Company/Industry Background

TFG is a closed-end investment management company that buys the equity tranches of collateralized loan obligations (CLOs), i.e., it invests in CLO residuals. TFG has invested in $1.4bn of CLO equities, which have been written down to $1.0bn, and it charges investors a 1.5% management fee and 25% incentive fee over a LIBOR + spread hurdle.

After a dislocation in the financial markets, CLOs (and TFG) can deliver higher return on equity (ROE) because they have fixed liabilities that can't be pulled off and they can generate outsized returns by locking in wider spreads.

Potential Risks

The key risk for TFG is deterioration in the health of the capital markets, which would lead to higher credit spreads and defaults, and consequently lower asset prices and cash - trapping in the CLOs. Even though TFG has no debt and its cashflows would not be impacted, its NAV would go down and with it, its price (it doesn't trade above NAV because of the high volatility and low/mid-teens planned ROE).

Bull Versus Bear

The bull thesis is that CLO equity has been growing rapidly due to spread compression in the institutional loan and high-yield markets, a trend that has continued in January 2011. The bear thesis is predicated on the loan-refinancing cliff that the market is facing in 2013-14 as CLOs enter their “end of reinvestment” period, which eventually takes out 40% of the refinancing supply.

Valuation

(Originally published February 21st) TFG trades at 75% of reported January 2011 NAV of $9.82 versus a 20% premium-to-NAV valuation for its closest comp, KKR Financial (KFN). This NAV excludes an additional $1.60 of value that will accrete into NAV from the reversal of its accelerated loss reserve (ALR), net of incentive fees. TFG's management has indicated that the NAV is projected to grow at a 15% IRR, based on assumptions that are more conservative than current market indications. Net of the 25% incentive fee, TFG's NAV will grow at a rate of 11.25%, so by year-end 2011 it could be $12.50 (inclusive of the ALR).

If it continues to narrow the discount to KFN and trades at 80% of NAV, the stock should be at $10, which is (now) around 40% upside from where it's been trading recently. Assuming KFN's 20% premium to NAV valuation, TFG could be a $15 stock, though there are reasons for a discount to KFN to persist: low liquidity, listed outside of the US, and investors feeling sour about management capturing 25% incentive from the ALR. Nerenberg's hedge fund Brenner West Capital has hedged its long position in TFG with a short of KFN.

This is only a brief excerpt. For more analysis of the latest investments made by top hedge funds, click here for the current 90-page issue of our newsletter: Hedge Fund Wisdom.

Zeke Ashton, Guy Spier, & Michael Lewitt: Value Investing Congress Presentations

Given the large amount of speakers at the Value Investing Congress, we're trying to dissect the day's events into digestible nuggets of information. The following article details the presentations from Zeke Ashton (Centaur Capital Partners), Guy Spier (Aquamarine Fund), and Michael Lewitt (Harch Capital Management).

We posted up comprehensive notes from day 1 of the Value Investing Congress here encompassing presentations by John Burbank, Lee Ainslie, and more. We've also highlighted Bill Ackman's question and answer session in a separate post as well. Make sure to check out those resources. Without further ado, the rest of the presentations from day 1:

Zeke Ashton ~ Centaur Capital Partners

Ashton has seen an impressive 16% CAGR since inception with his hedge fund, Centaur Capital Partners. He had some ideas in the property & casualty insurance space, notably Fairfax Financial (FRFHF) as well as Aspen Insurance (AHL). Fairfax is run by Prem Watsa, a man many have dubbed the 'Warren Buffett of the north' as he's based in Canada.

Aspen Insurance is a name we've seen in David Einhorn's portfolio for a while as well and Ashton believes it could see $40, a book value of 1.15 (it currently trades around $30 per share) as the company continues to buy back stock at a discount. He also sees Liberty Mutual as potential value when they eventually come public.

Turning to his next play, Ashton brought Biglari Holdings (BH) to the table. While he believes retailers in general are cheap, he sees BH trading at 8x free-cashflow and Sardar Biglari (the man in charge) only gets paid if FCF grows 6% per year. Many investors (particularly in the value investing community) have taken issue with Biglari's compensation package. Ashton sees lots of real estate value in BH and likes that they are shifting to a franchise model with their Steak n' Shake stores.

Biglari is essentially trying to create a Berkshire Hathaway-esque holding company/model as his company has made buyout offers for insurer Fremont Michigan (FMMH). Many have pondered whether or not Steak 'n Shake (now Biglari Holdings) was the next Berkshire Hathaway. Biglari also recently revealed a position in Sonic (SONC).

Centaur Capital Partners currently has 20% overall exposure to the retail sector. Ashton believes diversifying between retailers, restaurant, and a high quality operator (like Target - TGT) is beneficial in the space.

Lastly, Ashton mentioned that equity asset managers are cheap due to the public's current distaste for equities. He feels buying a basket of these stocks is a solid approach. He cited (CLMS) as an undervalued asset manager, Janus Capital (JNS), and also MVC Capital (MVC). Interestingly enough, the Centaur Capital Partners manager also noted his use of the iShares 20+ year treasury (TLT) as a hedge against interest rate risk.


Guy Spier ~ Aquamarine Fund

From a theoretical/educational standpoint, Spier highlighted to pay heed to a sign in Warren Buffett's office reading 'invest like a champ today.' Spier profoundly professed that starting relationships with the right people can have a very strong impact on your life as an investor. In particular, choosing the right investors for your fund sets your fate. He highlighted Whitney Tilson and Glenn Tongue's partnership to form hedge fund T2 Partners as well as Markel Corp (MKL) as another good example. On this notion, Spier recommended Michael Eisner's book, Working Together: Why Great Partnerships Succeed.

Shifting to specific picks, Spier actually sees Japan as a compelling potential investment. Screening for stocks in this universe returns a lot of companies with negative enterprise value, many of which are paying dividends and partaking in share buybacks. In particular, the Aquamarine Fund manager singled out Otaki Gas (TYO:9541), a pipeline company that owns assets in Japan. His best idea is slightly morbid in Heian Ceremony Service (JSD:2344), a funeral service business that can benefit from Japan's aging population.

Lastly, Spier had an intriguing quote on the notion of liquidity. He says that liquidity today is not important. Instead, liquidity is important when you want to exit a position.


Michael Lewitt ~ Harch Capital Management

Lewitt, also the author of The HCM Market Letter, started out by saying that we need to rid ourselves of fiscal problems because the traditional tools aren't working. He would prefer a constructive approach instead of pumping out another trillion dollars via quantitative easing round two. Lewitt feels that central banks are destroying currencies (especially in Japan). Also, he feels that naked credit default swaps (CDS) shouldn't exist and highlighted the situation with BP (BP) as an example. You'll recall that in the past we highlighted that Bill Ackman bought BP CDS.

In terms of opportunities, Lewitt sees bank loans as an attractive asset class because they are secured, can be leveraged to enhance returns, and many have 7% floating rates. As a play on bank loans, he likes KKR Financial (KFN). He highlights the 5.5% yield which should increase. He also singled out Tetragon Financial Group (AMS:TFG) trading in Europe.

Turning to bonds, Lewitt says junk bonds have been on fire (obviously). While he likes them, he notes you obviously have to be very selective due to their very cyclical nature. In particular, he finds value in BB and BBB corporate bonds.

Lastly, The HCM Market Letter author recommended utilizing ProShares UltraShort 20+ Year Treasury (TBT) as a way to short bonds. Keep in mind that since this is a leveraged ETF, it suffers from tracking error over longer time periods. He also advocated a long position in gold, something many managers have done.


That wraps up the presentations from these speakers. If you are on Twitter, we are posting live updates from the Congress on our @marketfolly Twitter feed. Be sure to also check out our comprehensive notes from day 1 of the Value Investing Congress.