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Don’t Listen to Warren Buffett, Invest With This Billionaire Instead

Photo credit: Flickr/thetaxhaven

There's no doubt about it: Warren Buffett is one of the greatest investors of all time. However, his recent headline-making moves in the energy industry won't earn investors following him as much as fellow billionaire investor Leon Cooperman. Here's why.

Buffett's boring energy bet
Warren Buffett's Berkshire Hathaway  (NYSE: BRK-B  ) recently made headlines when it purchased shares of global energy giant ExxonMobil Corporation (NYSE: XOM  ) . He now owns 40.1 million shares of ExxonMobil, which is currently worth more than $4 billion. As fellow Fool Tyler Crowe points out, Buffett and Berkshire Hathaway like ExxonMobil for a number of reasons. It's a strong, profitable business, with lots of new projects coming online and, despite large capital spending, it's still a very shareholder-friendly company.

The problem I have with ExxonMobil is that it's a yawner for investors looking to make some real money. It's already the largest energy company in America. Further, as Tyler pointed out, Buffett owned shares of Exxon back in the 1980s. That $178 million purchase would be worth more than $3 billion today. Unfortunately, the days of outsized gains like the ones in ExxonMobil are gone. It's just too big to grow that quickly. While Buffett is still a pretty exciting guy, his energy picks are old news.

Meet Leon Cooperman
Leon Cooperman got his start at Goldman Sachs. His 25-year career culminated in attaining the position of chief investment officer for its equity product line. From there, he founded Omega Advisors, which has earned its investors 16% annual returns since 1991. In 2012, he was one of the top-performing money managers in the business, earning a return in excess of 25%. That also earned him a nice payday, as he was the ninth highest-earning hedge fund manager that year, pocketing a cool $470 million.

Clearly, Cooperman knows a thing or two about making money. That's why investors might want to take a closer look at his top picks in the energy sector. Each should make investors far more money than Buffett's big bet on big oil.

Income and a little upside
Cooperman's top energy stock for income is LINN Energy LLC (NASDAQ: LINE  ) . As an oil and gas MLP, LINN Energy is a different kind of energy company. It scoops up mature oil and gas wells in the U.S., and turns them into income-producing machines. LINN Energy's units are currently trading around $32 apiece. Cooperman, however, sees LINN Energy trading at a discount to its net asset value. He pegs LINN's value at about $40 per share, which suggests it's undervalued by as much as 25%.

While waiting for that upside to materialize, investors can lock in a healthy 9% annual distribution. That's a lot higher than the paltry 2.5% that ExxonMobil investors like Buffett each year. Even better, LINN pays its distribution to investors on a monthly basis.

Deep value
Another of Cooperman's top energy stocks is SandRidge Energy (NYSE: SD  ) . Cooperman has called SandRidge Energy one of his "favorite holdings," because it has the best risk reward among his top 10 stocks. He thinks the $6 stock has an underlying value of at least $10 per share. That's conservative according to fellow hedge fund TPG-Axon, which fought for change at the company, saying previous management wasn't running the company in an efficient manner. At the time, TPG thought SandRidge Energy was worth as much as $14 per share, while another activist believed shares were worth upwards of $20. Clearly, there's a lot of upside here.

SandRidge Energy has really focused on ways to realize this value for its investors. That started by shifting capital spending to only its best acreage. SandRidge also shed non-core assets so that it can become a high growth producer. Bottom line, SandRidge is doing everything Cooperman and others thought it should do to enhance its value. At some point, the market will realize that this is a different company, and will assign SandRidge Energy the value it deserves.

Small cap
As his top small-cap selection, Atlas Energy, L.P. (NYSE: ATLS  ) is another company with potential to outperform Buffett's latest energy investments. In some ways Atlas Energy is similar to LINN Energy in that both are structured as an MLP. The big difference is that LINN Energy directly owns oil and gas wells, while Atlas Energy owns stakes in other MLPs. It earns income on its investments in, and management of, MLPs that own oil and gas wells, as well as pipelines and processing plants. Further, this is a management team that has created lots of value for investors in the past having sold the company's promising position in the Marcellus Shale at the top of the market a few years back. Cooperman is betting that the team can create value again as it takes Atlas in a similar direction.

Investor takeaway
Listening to Warren Buffett and buying ExxonMobil might make investors some money in 2014. However, the big money will be made by following Leon Cooperman.

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  • Report this Comment On January 08, 2014, at 2:38 PM, zorro6204 wrote:

    I hate to throw cold water on your article, but I've been watching Cooperman for a long time (I was in Cohen family companies, as was he). He made some absolutely disastrous calls just before the financial crisis, very bullish on what turned out to be blue chip rubbish like Alcoa. I also have to point out that his fund sold off a lot of LINE during the controversy, a very poor call, he should have been adding like crazy. For some reason he did not have the courage of his convictions, he's always supported LINE publicly.

    Of course, Buffet made some less than sterling calls too, but his strategy of buying and holding over very long periods of time has worked out brilliantly for him. Who knows on this one, I don't think he'll live long enough to see if Exxon is another Coke.

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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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