My 'Delivering Alpha' Takeaways

 | Jul 16, 2014 | 4:10 PM EDT  | Comments
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Stock quotes in this article:

brk.a

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brk.b

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vale

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pbr

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tmo

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c

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nov

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flex

You know I love ideas. So what a delight it was to host a panel today at Delivering Alpha where three brilliant managers laid out their best ideas: Leon Cooperman of Omega Advisors, Larry Robbins of Glenview Capital Management and Mike Novogratz of Fortress Investment Group.

First, before I detail what ideas they like, let me just say that these are competitive managers from way back. They don't do a panel like Delivering Alpha idly. They know their records and they want their records to be pristine. Nor do they like to just re-process the same ideas. While some of their ideas, of course, are core holdings, they also like to explore themes and names that fit the times.

I like that because they aren't just saying, "I am bearish right here and I don't like anything." Nor are they saying, "OK, it's all overvalued but here are some suggestions."

These people have real skin in the game and you make money listening to them. People may have heard Lee Cooperman's ideas the last two years and recognized that they substantially outperformed, in some cases spectacularly so. But what they might not know is that Lee's been teaching people ideas from way back and I managed to glean some of his wisdom when he was running research and I was a young kid at Goldman Sachs.

He could see I was an eager guy and he took me aside and told me that I ought to get the annual for a company out of Nebraska, led by a smart guy doing great things. Learn the CEO's philosophy, he said, and perhaps recommend the stock to my clients.

The idea? Berkshire Hathaway (BRK.A).

The price? $200 per share.

Now? It's $192,000 per share.

Got your attention?

Did I recommend it? Yes, I did.

Did my clients accept it? No. "Too expensive," they said.

I have never forgotten that mistake and I have vowed when I hear Lee's ideas to shout them from the rooftops so that people don't say "too expensive," although at the time the clients were really saying the dollar price was too high. Unlike now, very few stocks traded back then for over $100 per share.

Now, I don't want to start with Lee and I am not saving the best for last. I would like, for a moment, though, to begin by explaining to you some incredibly smart thinking from Fortresses' Novogratz because it's at the heart of what makes this business so exciting and, perhaps, if we get it right, so lucrative.

Novogratz is a contrarian who plays with macro big-picture ideas. He likes what others hate. Right now, he likes the two most hate-able markets in the world: Argentina and Brazil. The former involves a nation's solvency; I don't need to go there.

The latter, though, intrigues me and not just because we spent the last month watching the World Cup from Brazil. Novogratz likes Brazil because he says that things are so bad there that the current government could be ousted this fall and a new government, one much more pro-business, could be ushered in. Mike said he will invest in Brazil, which is good enough for some of the hedge funds in the room, but I know you like individual stocks.

That's why I pressed him for a company. I suggested Vale (VALE), the dirt-cheap mineral company that is doing everything right. He said he didn't want to be caught up in some iron ore trade but what he really liked -- what he thought could fly -- was Petrobras (PBR), the Brazilian oil company.

Now here's an idea I can live with. There is simply no doubt that Petrobras has among the best assets in the world. But there is also no doubt that the valuations aren't going to be realized under the current administration. If a more pro-business one did win, however, I could see his stock very rapidly moving 50% and I think that's an excellent risk/reward.

How about Lee and Larry? Let's start with a real oddity. Lee came with 12 stocks, Larry with six -- and you know what's amazing? They both recommended Thermo Fisher Scientific (TMO). We had Marc Casper, CEO of this great instrument company, on not that long ago at right about this price and all that has happened is the company has delivered, and more so. Both Lee and Larry like it because it is dirt cheap with very fast growth and a penchant for bringing out value, as all good companies do.

So why is it so inexpensive? Larry explained that growth rate had been hurt because one of its big customers is the U.S. federal government and the sequestration hurt health research, and TMO supplies health research equipment. But now the sequestration has run its course, which means it is time to pounce, making TMO my favorite idea from the conference both because of its timeliness and because of its duel sponsorship.

Second favorite? A Cooperman name: Citigroup (C). I have not had a fondness for Citi in ages but neither has the market as a whole as the stock trades below book value and has been held back by everything from hundreds of billions in bad loans to a bloated staff, failed leadership, government investigations and a lack of earnings momentum.

I am not saying that has all changed with the quarter reported earlier this week. But the company has put a lot of this turmoil behind it and CEO Michael Corbat has cleared the decks to start making real money again. It's not just that it's cheap and the problems are behind it, though. I think that interest rates are going higher -- something that was reinforced by much of what I heard today at the conference, and Citi is a great way to play it.

Next name? A Robbins idea: National Oilwell Varco (NOV). We've been behind this one for ages, in part because it is a pure play on increased oil drilling around the world and in part because it just did a restructuring that spun off a service business that makes this stock much more easily understood.

What most impressed me from the talk that Robbins gave? NOV is emblematic of a trend that's still in force: using a strong balance sheet to retire stock. National Oilwell Varco has a pristine one and Robbins believes that management is motivated to do a huge buyback. With earnings momentum and a buyback, this stock could go from the low $80s to $100.

Finally, I think old tech is making a comeback and Robbins mentioned one that I simply can't resist: Flextronics (FLEX), a contract manufacturer. I like Flextronics because it helps assemble products for Hewlett-Packard (HPQ) and Cisco (CSCO), both of which I think are doing quite well. He likes it because the company has about the most aggressive buyback I have come across: a pledge to buy 20% of the stock annually ... holy cow! Cheap at 9x earnings, the company in there buying, a strong customer base -- what's not to like?

There's much more to the conference, of course. But the bottom line for me is that we must never stop searching for ideas or listening to our successful elders and our peers. These gentlemen all had excellent ideas. I 've picked a few: Petrobras, Thermo Fisher Scientific, Citigroup, National Oilwell Varco and Flextronics -- all of which I think can work higher from here.

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