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 Omega Advisors
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.
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.
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.”
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.
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.”
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.
