Lee Cooperman's Macro View & Thesis on McMoran Exploration, Sprint Nextel & Tetragon Financial

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Lee Cooperman of Omega Advisors.  He talked about his overall macro view and then drilled down on three stock picks.


Cooperman's Macro Takeaways

He says he's been optimistic the last three years, but is indifferent about markets now.  He thinks we'll see slow growth and no recession (a 1 in 5 chance it happens).  He points to the ECB succeeding in kicking the can down the road and China avoiding a hard landing as keys going forward.

Cooperman argued that the Fed has created an environment that's best for equities.  Valuation is attractive when you compare it historically, though he later said that the valuation for the market now is "about right."  He says investors have de-risked and many managers are running low exposure.  Therefore, the max-pain trade is a move higher.

He believes that a peak in corporate profits in this business cycle is coming and that the fiscal cliff is a formidable issue for the market.  While the economy is not great, we need to see a bigger dent in unemployment.  We recently posted up another great presentation from Cooperman on hedge funds and life.

The Omega founder singled out high yield bonds as they yielded 20%+ in the crisis and now that yield is down to 6%.  There's been a dramatic re-pricing in high yield, but not so much in equities.  He again pointed out his disdain toward US government bonds, pointing out a contrarian signal that pensions have their third lowest equity exposure since 1997.

He thinks that investors will sell investments before the tax rates go up.  As far as the election goes, he's also pro-Romney.


Cooperman's 3 Stock Picks


1.  McMoran Exploration (MMR): He really loves the leadership of this company and thinks they're poised to do great things with their wells.  Currently trading at just over $11.75, he thinks the stock is worth $33 and points to Chevron and Freeport McMoran also being involved in their projects.


2.  Sprint Nextel (S):  He talked about how Softbank is putting $8 billion into the company and thinks the stub is worth $3.67 at 3x EBITDA.  He says the company is growing better than people give them credit for and many investors gloss over the name due to the poor Nextel deal.  Cooperman also pointed out past success by Softbank with telecom in Japan and Vodafone, noting vast improvement post-involvement of Softbank.  In 12-18 months, he thinks S is worth $6.50.


3.  Tetragon Financial (TFG):  He labeled this company as "too complicated" and blasted management at the beginning of his pitch, but then still managed to make the case for the company.  He said that you "go to bed with dogs, you wake up with fleas" and pointed out that the company hasn't had a conference call for 5 years so it's tough to get questions answered.

We're pretty sure he said his cost basis is around 2-3 in the name.  He pointed out the company's 20% return on equity, a book value of between 14-25 and the fact that a large portion of the company's market cap is in cash and it trades at a big discount to book.  It's also worthwhile that Cooperman has also held a longstanding position in similar company KKR Financial (KFN).


Perhaps the most telling statement from Cooperman was that he's sitting on a lot of cash now because there's a lot that can happen in the coming months.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

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.