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Why Leon Cooperman Is Spending Billions On These 3 Small-Cap Stocks

 February 11, 2013 03:47 PM

After 25 years of service, Leon Cooperman decided to retire as head of Goldman Sachs Asset Management in 1991. His retirement didn't last very long. Cooperman quickly launched his own investment firm, Omega Advisors. Two decades later, approaching his 70th birthday, Cooperman is outgunning his hedge fund peers, many of whom are several decades younger. His firm has now amassed nearly $7 billion in assets under management. 

We don't yet know how he did for all of 2012, but according to this report, Omega Advisors was up 27% through the first nine months of the year.

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A quick look at his top holdings shows the fund manager is still very much on top of his game. These 10 picks, accounting for 38% of his current portfolio, are all in the black. (Note that many of these stocks have been held for more than a year, so these are long-term gains and not one-year returns.)

Cooperman also has a deft touch with smaller companies. He may not be able to buy enough of their shares to make it on to his top-10 list, but they are also a fertile source for investment ideas. His firm has just provided a list of recent moves, which mostly involve lesser-known, off-the-radar stocks. From the looks of them, he has some more potentially strong gainers on his hands.

Here's a quick profile of three of them...

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1.MDC Partners (Nasdaq: MDCA)

Cooperman started building a position in this owner of advertising agencies in the second quarter of 2012, buying 160,000 shares at about $10. He picked up another 200,000 shares in the next quarter in the same price range. In light of a fresh filing that shows a total ownership stake of 6.7% in the firm, we can conclude his buying has propelled shares higher in recent weeks.

I profiled MDC back in April 2012, noting that the company's stock was far less expensive than rivals such as Omnicom (NYSE: OMC) and Interpublic Group (NYSE: IPG)

A few months later, I also noted that a recent industry transaction highlighted just how cheap this stock was (and still is).

Does Cooperman view MDC as a buyout fodder? Or does he simply see this company as a growth platform positioned to generate robust cash flow as the global economy mends? Now that he owns more than 5% of the company, we'll be able to track his moves with MDC via 13-F filings.

2.Home Loan Servicing (Nasdaq: HLSS)

Cooperman has had several changes of heart with this provider of mortgage-processing services. He picked up 470,000 shares in the first quarter of 2012, sold his whole position during the following quarters and just filed a new 620,000-share position. The twist: The recent purchase came at much higher prices.

Home Loan Servicing shares a key trait with MDC Partners: They both sport attractive dividend yields. In this instance, Home Loans has a yield of almost 7%, though looking at Cooperman's average basis in this stock, his effective yield is closer to 8%. Perhaps these two picks signal a subtle shift toward income-producing stocks and away from growth stocks. 

Indeed, in the table of his top 10 holdings above, you'll note Linn Energy (Nasdaq: LINE) and Atlas Pipeline Partners (NYSE: APL), both of which have current yields in the 7-8% range.

3.Given Imaging (Nasdaq: GIVN)

But Cooperman still keeps an eye on stocks that can deliver robust share price gains. One he's been tracking since 2008 is Given Imaging, which makes a digestible camera in the shape of a pill that can provide video images of a person's digestive system. 

By the end of 2010, Cooperman owned 3 million shares of this company, though he eventually took profits on roughly 1 million shares. Early in the fourth quarter of 2012, Given Imaging was the subject of buyout rumors, so shares quickly moved back up toward the $20 mark. Those buyout talks apparently led nowhere, and shares are now back down to $16. Cooperman has just noted that he's begun nibbling at shares again. It will be interesting to see whether he becomes a more aggressive buyer in the months ahead.

Risks to Consider: Cooperman may have taken profits in some of the stocks noted in table of top 10 holdings, so it may be unwise to pursue further research into those stocks until his firm provides a full year-end update of the portfolio.

Action to Take --> Though he's been in the business for nearly a half-century, Cooperman still shows a fertile mind, identifying eclectic off-the-radar stock picks that are mixed in with more tried-and true investments. Tracking his fresh filings can be a great way to identify fresh ideas for your portfolio.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of MDCA in one or more of its "real money" portfolios.


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