By guest contributor Insider Monkey author Jake Mann. It’s not uncommon
to hear hedge
fund managers and
other prominent investors sounding off on the economy, companies they’re
invested in, or even why they hate Apple. So when Leon Cooperman, the billionaire head of
Omega Advisors, was on CNBC earlier this week discussing his favorite stock
picks, it would appear that this was rational advice all viewers should pay
attention to.
Except it’s not.
According to our
research at Insider Monkey, the best opportunity for hedge fund piggybackers to
outperform the market lies in the small-cap space. Our newsletter that follows
this strategy returned 47.6% in its first year (learn how we did it here), and longer-term returns are equally as
promising.
In his interview on CNBC, Cooperman mentioned five of his top value investments:
Sprint (S), AIG (AIG), Qualcomm (QCOM), KKR Financial (KFN) and SandRidge
Energy (SD). All of these picks are fine and dandy in their own right, but only
the last two are actually small-caps. In addition to KKR and SandRidge, Leon Cooperman has a few other small-cap stock picks that you should
know about.
Atlas Energy
Atlas Energy
(ATLS) is Cooperman’s top small-cap pick, and sits at the seventh largest
position in his $6.5 billion equity portfolio. Richard Driehaus and Jim Simons are a couple other names that hold this oil and gas
E&P, which is up 45% year-to-date. Shares of Atlas have had such a good
2013 because of a few factors: 1) MLPs have seen rising interest from
traditional institutional investors, 2) more ETFs are looking at this space, 3)
dividend yields have been growing, and 4) the macro environment for domestic
natural gas, oil and NGLs is very bullish.
In addition to the
impressive appreciation, Atlas Energy pays a 3.5% dividend yield that has
quadrupled since 2011, and the valuation isn’t overblown at an enterprise value
2.3 times its revenue.
Chimera Investment
Chimera Investment
(CIM), on the other hand, is a small-cap REIT that has been held by Cooperman
since the second quarter of 2012 (see the full history here). Like the mythological origin of its name
suggests, Chimera is a multi-faceted REIT that invests in residential MBS and
different types of mortgage loans and it
breaths quite a bit of fire with a 12% dividend yield.
Although quarterly
dividend payments have fluctuated in value, they’ve been consistent in presence,
and free cash flow has more than doubled over the past two years. On average, Wall
Street expects funds from operations to grow by 5% to 6% a year over the next
half-decade, but be aware that FFO has missed analyst targets in four of
Chimera’s past five quarters. Even with the volatility, there’s no denying this
REIT’s ridiculously attractive yield.
Atlas Pipeline Partners
Keeping
Cooperman’s big bet on Atlas Energy in mind, it’s no surprise that the
billionaire is also bullish on another MLP affiliated with the company, Atlas
Pipeline Partners (APL). The natural gas processor is the 14th largest holding
in Cooperman’s equity portfolio, and shares have had a solid year, up 20.8%.
In comparison to
Atlas Energy, Atlas Pipeline’s focus as a full-service midstream company has
allowed it to generate about twice the cash as its aforementioned ally, and
thus, a higher dividend yield. Atlas Pipeline currently offers a yield of 6.5%
on its shares and dividend payments have grown in five consecutive years.
A couple more
We haven’t even discussed
KKR and SandRidge yet. The latter is another oil and gas E&P, but unlike
some of Cooperman’s other picks in the energy sector, SandRidge does not
currently pay a dividend. With earnings growth of more than 40% expected this
year alone, however, there’s much more momentum behind any bullish thesis here,
and shares are actually pretty cheaply valued at 1.6 times book and a close
parity on a price-to-sales basis.
Cooperman has held
SandRidge stock since the fourth quarter of 2012 and depending on when he
bought in, he could have booked as much as a 15% return so far on his
investment.
KKR Financial,
meanwhile, sits just inside Leon Cooperman’s 15 largest holdings and offers a
whopping dividend yield of 8%. Yes, they’re up only 3.5% over the past year,
but shares of KKR Financial are extremely attractive because of their depressed valuation; they trade at less than 7
times forward earnings and a price-to-earnings growth ratio of a mere 0.6. With
double-digit annual earnings growth expected over the next five years and
positive free cash flow, dividends appear sustainable.
Disclosure:
none