The hedge fund titan worries about the market’s long-term outlook but is still betting on select securities.
Billionaire investor Leon Cooperman is cautious about the stock market’s prospects in 2021.
While the 77-year-old hedge fund titan still sees opportunities in the market, he warns of excessive speculation and signs of “euphoria.” Cooperman is especially worried about the long-term market outlook given rising U.S. debt levels and the federal deficit.
“I think we’re borrowing from the future,” he says. “The Federal Reserve is forcing people out on the risk curve and driving stock prices (up) … it’s not going to end well.”
While Cooperman describes the Federal Reserve as “driving the bus” by promising low interest rates for the foreseeable future, business confidence and economic growth are unlikely to improve going forward, he argues. “Price-to-earnings ratios are a function of those three things—and in my opinion, two out of the three are negative right now.”
A legendary investor, Cooperman spent 25 years at Goldman Sachs before founding his hedge fund, Omega Advisors, in 1991. The fund quickly became known for its strong performance, generating annualized returns of around 12% through 2018, when Cooperman turned it into a family office. He is worth $2.5 billion, according to Forbes.
Cooperman thinks there is “too much bullishness” in the market today, arguing that the S&P 500 is fully valued and he expects little return going forward. “Not one forecaster is predicting the stock market to decline in 2021,” Cooperman points out, with the median forecast at just over 4,000 points (the S&P 500 finished 2020 at around 3,700 points). “Everyone’s on the same side of the boat—I think you have to worry about that.”
While Federal Reserve chairman Jerome Powell has promised low interest rates for the next two or three years, that has bolstered “excessive speculation” in the market by “rationalizing the rate of valuation and tying it to interest rates,” Cooperman says. “Now is the time to be conservative—just look at Tesla stock, Bitcoin, options trading volumes and the frenzy in IPO activity—these are all signs of speculative excess on Wall Street.”
The billionaire hedge fund titan is particularly skeptical of the SPAC boom, calling it “another sign of excess” taking place on Wall Street. “Everyone is going into the SPAC business these days,” he cautions, adding that he turned down the chance to sponsor a blank-check company in late 2020. “People should be very careful.”
The way Cooperman sees it, there are three stock markets today. The first of those is the “FAANG Market,” including tech giants like Facebook, Amazon, Apple, Netflix and Google-parent Alphabet, which have all benefited as people stay at home due to the coronavirus pandemic. While trading at huge valuations and multiples of earnings, these Big Tech stocks have been on a tear thanks to demand being pulled forward, Cooperman says. “But with interest rates at such low levels, the FAANGs aren’t overvalued,” he says. “Nothing looks expensive.”
“Not one forecaster is predicting the stock market to decline in 2021. Everyone’s on the same side of the boat—I think you have to worry about that.”
The second market is what Cooperman calls the “Robinhood market,” comprised of young, retail investors using zero-commission brokerages. With people stuck at home during the pandemic, many of these newer investors have turned to platforms like Robinhood to gamble on the stock market. They’ve bid up bankrupt or struggling companies like Hertz, Eastman Kodak and many of the major airlines, which saw their stocks plummet amid coronavirus. “A lot of irrational things are being done in this market that on the surface don’t seem to make a lot of sense,” Cooperman describes. “This market will end in tears.”
The third market identified by the billionaire investor is “the rest of the market, where you can still find lots of value.” If you manage your risk, there are still opportunities to be had, says Cooperman.
One of Cooperman’s largest holdings is Google-parent Alphabet, which he recently added to in the last quarter. He thinks that with interest rates set to stay low, Google’s stock—which trades at 34 times trailing earnings—isn’t overvalued and still remains attractive. Alphabet shares jumped nearly 30% last year, despite the company’s advertising revenue taking a hit as the pandemic wreaked havoc on the travel and tourism industries. Market analysts expect upside in 2021, however, as businesses start to recover from the pandemic and advertising rebounds. Alphabet also continues to see strong growth trends in some of its other business segments, particularly YouTube and Google Cloud.
Cooperman likes this specialty chemicals provider, which he has owned a position in since 2014. While Ashland’s stock underwhelmed in 2020—only gaining 3.2%, Cooperman has gotten some nice dividends (the current yield is 1.4%). He sees “a lot more margin expansion” ahead for the chemical company after its current restructuring program, which he thinks is “progressing nicely.” Ashland’s current CEO, Guillermo Novo, took the helm at the start of 2020, joining after a three-year stint at semiconductor company Versum Materials. Margins at Versum improved drastically with Novo at the helm, Cooperman points out, adding, “I think he can do the same at Ashland.”
Cooperman is bullish on the financial sector, especially after the Federal Reserve announced in December 2020 that it will allow banks to resume stock buybacks in the first quarter of 2021. The billionaire investor particularly likes Citigroup, pointing out that the bank is strongly capitalized, has a nice dividend yield (currently 3.13%) and its shares are discounted to annual book value. While Citi’s bottom line suffered after the federal funds rate began falling in late 2019 and eventually plunged to 0.25% after the coronavirus-induced recession, Cooperman sees upside coming out of the pandemic. “As interest rates eventually rise, earning opportunities will also improve,” he predicts. Citi’s stock fell 24% amid the coronavirus recession in 2020, but is up over 10% so far in 2021.
One of Cooperman’s more under-the-radar stock picks, Toronto-based Largo Resources is one of the world’s largest producers of Vanadium, an alloy used to strengthen steel. The stock, which trades for just over $1 per share on OTC Markets and has a current market capitalization of a mere $630 million, sells at a low valuation against its earnings potential and has no debt, Cooperman says. (It hasn’t been profitable but trades at 11 times a forward price to earnings.) He argues that the alloy will be in high demand moving forward, especially thanks to record steel production in China. The billionaire investor thinks that while somewhat “speculative,” this investment has little risk with high potential return.
Cooperman’s largest position today is a bond—not a stock—that he calls a “no brainer.” In April 2020, wireless communication company Ligado Networks, which is not publicly traded, finally won approval from the Federal Communications Commission to repurpose its old satellite spectrum licenses to build a new 5G network. (Ligado Networks has a colorful history: It was formerly called LightSquared and was founded by hedge fund investor —and former billionaire- Phil Falcone. It filed for bankruptcy in 2012, then emerged from it in 2015). The FCC approved Ligado’s 5G efforts in a unanimous vote, despite public objections from Defense officials that the new network would interfere with military and civilian GPS systems. In October 2020, Ligado refinanced $4 billion in debt by completing a dual-tranche bond that offered investors whopping returns up to 17.5%. Cooperman especially likes the first-lien notes, a bond that offers a 15.5% coupon with a three-year provision. “There’s very little risk,” he says. With the bond trading at around $100, Cooperman thinks it could go as high as $150 within the next three years.