'The Market's Down, Not Doomed': Critiquing Lee Cooperman's Barron's Interview

In this week's Barron's, Lawrence Strauss interviews Mr. Lee Cooperman, co-founder, chairman and chief executive officer of Omega Advisors, a $5 billion long-short hedge fund. Mr. Strauss reports that the fund "has returned 16% annually, net of fees, besting the S&P 500 by 5.50 percentage points. During the first half of the year, it was down 4%, compared with a loss around 13% for the S&P."

Let me be quite clear. You cannot use the S&P 500 Index as a performance benchmark for a hedge fund that uses various types and amounts of leverage. Any reasonably skilled asset manager can beat the S&P if they are using leverage and shorting strategies. The pathetic reality is that many of them have not, at least not consistently. Arguably, leveraging strategies expose funds to much higher levels of risk than that seen in the S&P Index, so it's like comparing apples to bananas. So as far as the 16% annual returns since 1991, I am only moderately impressed.

What I'd like to see are the leveraged positions in the fund during that time period. Only by knowing this information would I be able to determine the risk-adjusted performance, which is the only thing that matters. However, I am much more impressed by the fact that the fund has thus far weathered two drastically different economic and market periods, while returning nice annual double-digit gains. But again, the most important thing is to determine the risk-adjusted returns of the fund.

Now let's take a look at this interview and see what Mr. Cooperman had to say.

Cooperman's Market Guidance

"But this is not an environment to be complacent."

For 99% of investors, it is a time to do nothing other than watch and wait. To me complacency only means you shouldn't fall asleep at the wheel. By no means does it necessarily imply you should be aggressively searching for "bargains" because they might end up looking like overpriced picks in a few months.

"The ingredients for a decent bottom are in place…"

Perhaps I am wrong, but I would interpret that statement to mean "it's likely the market will go lower." If Mr. Cooperman knows what is going on, and I am sure he does, I would suspect he realizes that the chances of the market going lower are much higher than bottoming over the next several months. The longer-term trend is down and that is all that matters unless your focus is short-term trading.

"But any significant upside is going to require help from two areas. No. 1, we have to see a bottoming in home prices. No. 2, we are going to have to see crude-oil prices recede."

Perhaps Mr. Cooperman might wish to offer some ways by which these important goals can be accomplished rather than stating the obvious. For instance, he might have proposed some ways to identify a housing bottom or give some hints to investors when bottoming might occur, if you have a clue. In my opinion, one of the things to look out for is a decline in the median home price to median income to around 3.5. In some parts of the nation, this ratio may descend only to 4. There are many other variables but this is certainly a good start.

Cooperman's Investment Strategy

"The market looks attractively priced in an absolute sense and relative to inflation, bond interest rates and to other assets."

What about emerging markets? Might it be worth the time to start looking into buying opportunities for long-term investors? And if "attractively priced" equated to price performance, why is does the market continue to drop in price relative to gold? Remember folks, after setting an all-time high of just under 40,000 nearly twenty years ago, the NIKKEI is still only 13,500.

"We are buying plenty of attractively valued securities."

Attractively valued by what measure? Are they "attractively valued" for investors with a 5-year investment horizon and without a virtually endless supply of cash they might need to dollar-cost average and offset losses with shorting strategies and other positions? This illustrates the fact that often what may be good for a fund manager could be disastrous for individual investors. Why doesn't Barron's and other publications ever interview experts who can give more individualized recommendations? Most experts are only concerned with pumping up the securities they like so their fund will perform better.

Cooperman's Stock Picks

Corning (GLW)

"There are thousands and thousands and thousands of retailers that sell flat-screen TVs. There are roughly 50 companies that make the panels. There are only three guys that make the glass."

I would have to pass on Corning based on the uncertainty of its business down the road. Don't forget Corning had some huge problems just a few years ago, sending the stock to a low of $1.10. It was primary the LCD business that rescued them. How long can we expect LCDs to carry them? No doubt, they will be replaced by more advanced technologies in the coming years. Even before then, I can't see too many consumers with the money to shell out for LCDs anytime soon. Finally, the average electricity bill for LCD televisions is around $100 per month (depending upon your local electricity rates). Once consumers begin to realize the energy inefficiency of LCD televisions, this will not only discourage sales, but it will open up the gates for competitive technologies, of which GLW might not be involved.

In all fairness to Cooperman, the financials look quite good. And as it stands right now, I agree it's a pretty good value just from looking at the financials alone. But sophisticated investors look at other things, namely the economic picture and the fate of consumers, all of which factors into market risk and therefore relative valuation. Perhaps he has considered these other variables, but I did not see them mentioned. In short, without a proper risk disclosure, it's more of a sales job than anything else. We must also remember that investment risk depends not only on what lies ahead but also when the security was purchased and at what price. For those already holding GLW, this might be a nice time to pick up more, but I certainly would not be initiating new positions right now, especially given the market risk.

Transocean (RIG)

"It owns one-third of the world's supply of deepwater drilling rigs, and has a $40B backlog - the size of its market cap."

Did he say backlogs? I recall dozens of companies a few years ago that reported billions of dollars in backlogs as well. Do you recall Nortel? The great thing about touting backlogs is that management can always say "things changed." The fact is that the chart shows the stock to be trending downward for at least the intermediate term.

I will say that the financial ratio does look compelling but drilling rig companies have many factors involved, making earnings prospects complicated to determine. If you believe the peak oil story, why not stick with the oil suppliers instead, specifically the oil trusts paying double-digit dividends? From a historical basis, the stock is clearly way ahead of itself and while that might last somewhat due to the oil problems, long-term investors should be very careful about buying RIG at these levels. I certainly wouldn't buy it here.

WellPoint Health Networks (WLP), UnitedHealth (UNH), Aetna (AET)

"WellPoint Health Networks (WLP), UnitedHealth (UNH) and Aetna (AET) have been over punished."

Here is where we agree 100%. I even issued a buy list a few weeks ago which included UNH. But why not provide further insight? Just because stocks are punished does not mean the price decline is overdone. How about talking about the monopolistic HMO price manipulation and the flooding of 80 million baby boomers into hospitals or the chronic disease crisis, not to mention the fact that chronic disease treatment accounts for around 80% of all hospital expenses?

The problem is that if you aren't aware of these factors, all you will know is what Cooperman has told you. Unless you are an expert in healthcare, it's unlikely you'd know these things I have mentioned. And most likely, unless you are specifically searching for them while doing your own research, it would take a very long time to uncover them. Apparently, Cooperman isn't particularly familiar with these trends because his basis for buying the HMOs, as stated, is weak.

Finally, I'm wondering where Pfizer (PFE) is on his list? When you talk about value, you have to mention Pfizer for dividends alone. The scant drug pipeline is old news and has been factored into the stock. I address these things in my previous articles.

SLM (SLM)

"Probably 95% of its loans are government-guaranteed and the stock sells at 10 times earnings. A year ago, a private-equity firm wanted to buy Sallie for $60. You can buy it now at $18."

I agree with Cooperman somewhat. But once again, he stops short of presenting a compelling case. Understand that there is absolutely no way to get out of student loans, other than death. Even then, they will come after your estate. However, the big blunder made by management of committing to repurchase a huge amount of stock at what are now very high prices is a major reason for the price decline. In other words, regardless how bullet-proof a company may seem, there will always be potential problems. It always comes down to great management, something lacking in Sallie.

In conclusion, just because a fund manager is made into a superstar by Barron's, television networks, or any of the other publications for the herd, don't necessarily assume these guys are making good calls. And don't assume their agendas are consistent with yours. Managing a huge fund is quite different than managing an individual portfolio. Each has different goals, resources and objectives.

In all fairness to Cooperman, I know first hand that journalists often cut and paste portions of interviews, sometimes leaving critical details out. Certainly, Cooperman is no fool, but that does not mean you will make money just by reading one for his interviews. If making money was only that easy.

At the end of the day you need to question everyone and everything when it comes to those in the spotlight because things are often not what they seem. And when fund managers and others fail to discuss the risks, you should always take what they say with a grain of salt. That is the single best way you can position yourself to recognize opportunities and address investment risks.

Disclosure: Long UNH