Wednesday, January 27, 2010

Legendary Investor Bill Miller Sees Values Hidden in Plain Sight

Bill Miller is the legendary investor from Legg Mason Capital Management that beat the SP500 for 15 straight years (CNBC claims it was a record) before the financial crisis just about destroyed Legg Mason and his reputation. Bill has basically been in the investment wilderness for the last couple of years as the doom and gloomers took over the media. Recently he appeared on CNBC (see video below) and penned this interesting commentary for January.

One of the biggest issues I've noticed with Bill is that he seems clearly focused on just US stocks. He wasn't a big investor in commodities in the 2000s which is what lead to his under performance. Now after a good 2009 he seems to be regaining some of the spotlight so it's interesting to see what he says now especially since Stone Fox Capital has similar views in valuing assets and the stock market.

Like us he seems clearly more bullish on profit growth and higher GDP then the general market expects. Anybody watching CNBC will see numerous people coming on TV claiming how over valued stocks are these days. What they don't mention is that current estimates now are that corporate profits will growth 25% in 2010 and the SP500 will reach $95 in 2011. Slap a 15 PE on that and the SP500 would reach 1,450ish by the start of 2011.

Bill also makes the point that we've made since back in October that the financial crisis is long over yet the stock market still trades 10% below the 1,255 reached after the Lehman collapse.

He also points out some of the real obvious psychology issues that the market faces. Bonds crushed stocks over the last 10 years so investors have piled into bonds. Now just when stocks should be more attractive nobody is listening. Also, Treasuries are probably the biggest bubble around (or should be) as the Fed rate can't remain this low.

As he says 'values are hidden in plain sight'. Bill seems to favor names such as Merck and IBM trading at 12x 2010 earnings. Very cheap indeed but we favor smaller cap names like a AerCap (AER) trading at less then 5x earnings and faster growth. Or even a Terex (TEX) that could double/triple as the cycle rebounds. In a rebounding market, small caps should out gain large caps but the size of his funds might preclude investing in small caps.

We're in complete agreement that the fed funds rate should be in the 2.5% range to be neutral. It should've never gone below say 1.5% or so and the market shouldn't react negatively to a funds rate increasing until it gets above the 2.5-3% level or causes a inverted yield curve.

Our biggest disagreement is in the commodities sector. He is negative about materials stocks and industrial metals. He makes a great point that China is 'structurally short' oil therefore they have a desire for prices to fall. Unfortunately I'm not sure they have that choice. For prices of coal, copper, and oil to fall it would require much lower growth and hence demand out of its consumers. For that to happen, the Communist party would face social unrest so while they do a lot to keep prices down such as buying resources during the crisis they can't afford to keep demand down. He might be correct that growth in the stock prices might not be as high in 2010 though I'll still argue that a stock like Alpha Natural Resources (ANR) is still extremely below its 2008 high. To me most of those stocks haven't run too much yet.

All in all, Bill Miller is an investor that should enjoy equal followings with the doom and gloomers and even the 'new normal' guys at PIMCO. The latter have become more popular after this crisis, but if anything it should have taught us that the likely accurate forecasters will not be the ones from the crisis. Would you follow the call of Meredith Whitney or Bill?

Below are the results for the last 10 years of his fund - Legg Mason Value. This includes the last 8 years of the 15 years he beat the SP500 plus the 3 years that he underperformed. Very interesting how he got the 2000 recession correct (ok only on a relative basis), but completely missed this one. 2009 was a stellar year so maybe hes back for another 15 year run.


ANNUAL TOTAL RETURN (%) HISTORY
Year
LMNVXCategoryDiff
2009

N/AN/AN/A
2008

-54.61-37.79-16.82
2007

-5.736.16-11.89
2006
6.9214.17-7.25
2005
6.365.880.48
2004
13.0910.023.07
2003
44.9927.0517.94
2002

-18.06-22.254.19
2001

-8.39-13.505.11
2000

-6.24-6.310.07
1999
27.9920.167.83


Clip from his recent appearance on CNBC:












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