Two prominent hedge fund managers are betting that the next 10 years will be far better for U.S. stocks than the "lost decade" just past.
Leon Cooperman and Steven Einhorn, who run New York-based Omega Advisors Inc., are bullish on the S&P 500 stock index, which closed Thursday at 1,283.76 points and is still below its peak of 1,527 in 2000. They say the U.S. market will be fuelled over the next few years by a growing economic recovery, tempting valuations and piles of cash on the sidelines still waiting to be deployed.
"The S&P 500 will have a double-digit return in 2011," Mr. Cooperman predicted in an interview. "We are seeing an improving economy. … We see high cash reserves on the part of institutions and individuals, and we see attractively priced stocks."
Their stance contrasts with Canadian hedgie Eric Sprott, who recently said he was more bearish now than over the past decade, and suggested it was "entirely possible" for the U.S. market to plunge back to the March, 2009, low of 667 points.
"We don't think you'll see 667 in our lifetime again," said Mr. Cooperman, bristling at the bearish view. "I am 68, and I hope to live a long time. And Steve is 62."
Like Mr. Sprott, the Omega managers have track records of beating the index. Since its inception in 1992, the $5.5-billion (U.S.) Omega Capital Partners LP hedge fund has returned 13.5 per cent annually, net of fees, and outpaced the S&P 500 by an average of 5.4 percentage points. Mr. Cooperman and Mr. Einhorn will be running the Omega Advisors U.S. Capital Appreciation Fund, a closed-end fund that will list in Canada next month and mirror their hedge fund.
"We've had a very good record of calling the market," Mr. Cooperman said. "We are the first to admit that we underestimated the significance of the Lehman insolvency, so we got caught in [the financial crisis of]2008. We went down, but we went down less than the market, and we have come back quite dramatically - more than the market."
Mr. Cooperman is confident that the U.S. Federal Reserve Board will get the U.S. economy back to healthy growth, rather than letting it sink into a prolonged slump comparable with Japan's past 20 years. He also maintains that the European Central Bank will come to the rescue of financial institutions to control the euro zone's debt crisis.
The Omega managers had anticipated that U.S. President Barack Obama would soften what they call his "anti-wealth, anti-business stance" after the U.S. midterm election. "He is doing it because he wants to get re-elected," said Mr. Cooperman, pointing to the recent extension of the Bush-era tax cuts as one example of a more business-friendly mentality in Washington.
Mr. Cooperman, a value investor and the firm's stock picker, founded his shop in 1991 after 25 years at Goldman Sachs, where he was chief investment strategist and ran Goldman Sachs Asset Management. Mr. Einhorn, also a Goldman Sachs alumnus and now vice-chairman of Omega, joined the firm in 1998, and focuses on the broader economic picture and market outlook.
Mr. Einhorn sees the S&P 500 climbing to a range of 1,375 to 1,400 points this year on the back of a "self-sustaining economic expansion" propelled by job growth, and pent-up consumer demand. This kind of recovery tends to last four or five years, and "we are only 18 months into this one," he said.
"We don't expect the Fed will tighten in terms of the federal funds rate until at least the middle of 2012, and we believe that it will continue in its quantitative easing through to the middle of 2011."
Mr. Einhorn's optimism reflects the fact that markets are typically strong in the six months after a U.S. midterm election. The third year of a U.S. president's term "which we are now in, is the strongest of the four presidential years," he added.
Stocks in the S&P 500 are attractively valued at 13 times projected earnings, when historically the index has traded at over 15 times, he said. "And when interest rates and inflation are where they are currently, the multiple has tended to range from 17 to 19."
The U.S. government's enormous budget deficit is one potential headwind to Omega's bullish case. If foreign buyers of U.S. Treasuries, like China and Japan, start to turn away, that will bring a significant lift in interest rates, Mr. Einhorn said. A further severe drop in U.S. home prices, Europe's debt woes spreading to the U.S. banking system and a significant slowdown in the Chinese economy could also threaten a U.S. recovery, he acknowledged. "We are watching them carefully."
Leon Cooperman's stock picks:
The student-loan provider, also known as Sallie Mae, has 83 per cent of its portfolio in government-guaranteed loans. Mr. Cooperman likes the fact that Jack Remondi, credited with steering the firm through the economic crisis as chief financial officer, was promoted to chief operating officer. He argues that Sallie Mae's various parts are worth $16 (U.S.) to $18 a share. SLM closed Thursday at $14.09 a share.
Teva Pharmaceutical Industries Ltd.
The generic drug giant generates $3-billion a year in cash flow that it can channel into dividends, stock repurchases and significant acquisitions, Mr. Cooperman said. "It earns a superior 20-per-cent return on equity and has a very strong balance sheet, but its stock is mispriced." Teva closed Thursday at $54.57 a share.
General Motors Co.
The auto maker will benefit from growth in China. It will also get a boost at home as the U.S. economy recovers, and annual auto sales climb well beyond their current level of 12.5 million vehicles, Mr. Cooperman said. "We think the stock should be able to get close to somewhere between $45 and $50 a share." GM closed Thursday at $38.27.
Join us for a live discussion on the financial services sector with Aegon Capital Management's Crystal Maloney on Monday, Jan. 17 at 12 noon ET. Ms. Maloney is the portfolio manager for Aegon's Trans IMS Canadian Financial Services fund, which has trounced its peers in both the short and long term, according to Lipper Inc. Over the past three years - which includes the financial crisis - the fund has declined just 3.4 per cent versus a far-sharper 11.8 per cent decline among its peers.