The Case for a Continuing Bull Market
Hedge fund managers tend to be a pretty secretive bunch, rarely interacting with the press or public. Earlier this month, we had a chance to hear Leon Cooperman, founder and chairman of Omega Advisors and a Wall Street legend, address an investment conference at Columbia University Business School, Cooperman’s alma mater. What stocks does Cooperman like? We’ll tell you, but first here’s a description of the way he views the economy and the markets.
Before establishing Omega in 1991, Cooperman spent 25 years at Goldman Sachs, rising to become chairman of Goldman’s asset- management business. Institutional Investor magazine voted him the top portfolio strategist on Wall Street nine consecutive years.
Cooperman’s research and analytical rigor shows through in the way he invests. More than most fund managers, he starts with a top-down view, analyzing the economy and market valuations. This steers him to asset allocation, which research, he notes, has demonstrated is more important than specific stock selection in determining investment performance.
So what does Cooperman’s crystal ball tell him about the stock market today? He sees little downside risk this year and predicts a rise ranging from high-single to low-double digits. He says that the excesses typically present before a bear market -- accelerating inflation and economic growth, a hostile Federal Reserve Board, extended market valuations -- are not present. “Bull markets die from excesses, not old age,” he says.
Furthermore, Cooperman notes that this has been a highly unusual bull market: 103% of the advance in Standard & Poor’s 500-stock index is due to earnings growth. In other words, more than four years into the bull market, there has been no expansion in the price-earnings multiple. In each of 2004, 2005 and 2006, the market’s price-earnings ratio actually contracted. Cooperman looked back over a century of stock market data and determined that the odds of the market P/E contracting four years in a row (that is, in 2007 as well) is just 2%.
For several reasons, he thinks the market could rise by more than 10% even if earnings growth is only 7% (his forecast) this year. Historically, P/Es are higher than they are now when inflation is in the current 1% to 3% range. The spread between corporations’ cost of equity and return on equity is unusually high now. Finally, Cooperman argues that publicly traded companies are actually overcapitalized -- their balance sheets are too conservative -- which makes them a target for takeovers or leveraged buyouts concocted by private equity funds. By his calculation, 90% of public companies are of a scale that could be digested by private equity funds.
You’ve been patient, so we’ll reward you with a list of nine stocks that Leon Cooperman likes. He provided no explanation for selecting these shares, so you’ll need to compare notes. Here’s the list: Agere Systems (symbol AGR), Best Buy (BBY), Corning (GLW), Halliburton (HAL), Transocean (RIG), Microsoft (MSFT), Qualcomm ( QCOM), United Health (UNH) and Wellpoint (WLP).