Consuelo Mack WealthTrack
Bill Miller is riding the bull
Legg Mason Capital Management's chairman on overcoming fears about the housing market, why he's bullish on stocks and his thoughts on where Apple stands today.
This week on Wealth Track, legendary investor, Bill Miller is back in the winner circle. In a Wealth Track exclusive, Miller shares with proof his Legg Mason opportunity bond across the finish line in first place last year how he is accelerating to the lead now. Great investor, Bill Millar, is next on Consuelo Mack Wealth Track. A lot of what went right is what went wrong in 2011 when we had a bad year, and in 2011, people thought that we're gonna have 2008 again, except it would be located in Europe, and so, Italian bonds, Spanish bonds-- everything went crazy and people sold off American stocks in sympathy with that, and so are funded poorly even though our stocks did well. When it turned out that we didn't have 2008 redux, the fund did spectacularly well in 2012 and I think part of what happened was so many people trying to surf the market and react to a short term stuff, so people change their asset allocation and change what they were buying based on the fears of 2011, we just stayed the course, so when those fears didn't come to pass, we had a great 2012. -So, the things that people were fearful of and this is kind of a trademark of your deep value investing is they are fearful of anything related to housing, right? You invested in airline stocks, which I will talk to you about it because don't ask me. I just can't imagine anything investing in airline stocks. -That's just me and David Tepper turns out right now. -Yeah, exactly, right, and some financial. So, explain to me number one how you view the housing stocks now. Let's just start with them? -Well, the housing stocks since the fall of 2011 are up 150% to 100% and what's bizarre about October and November 2011 was kind of like folding homes and major home builders was trading at half where it was trading in 2008 at the bottom of the financial crises. So, you know, was that 3 years later after home price dropped 35%, after faulty book gone from 25 to 5, after written of billions of dollars of land, and after non-distress home prices started up, it was half the value of it was in 2008. That just made no sense. -Yup. So, faulty was, I think, 150% from November of '11 to November of 2012. So what happened was that people were so terrified of the repeat of 2008 and a further down drop in housing that they put these housing stocks at crazy valuations even though the evidence would suggest, otherwise. -So, let me stop you there because you're right. Other people were terrified and they didn't wanna get anywhere near the housing stocks. So, what is it-- I mean how are you not terrified, how are you not seeing yourself, you know, the market is smarter than I am possibly and, you know, maybe they know something that I don't know or maybe these things are just not gonna back for several more years. I mean, I don't wanna be so early that I'm gonna lose my shareholder share on this, so-- -How lost their-- on their share on 2011 by being early, yeah, or we were months early than that -Right. But how do you overcome, you know, that fear that most of us have? -Well, the question is what kind of mistake would you likely to make? So, if you take something like financials where we made mistakes in 2008. -Right. -Those mistakes proved to be in the case of, you know, you makes mistake on bear's turns on an AIG. It can be a fatal mistake. These financials are highly labored and they are subject to confidence whereas the housing companies by in large. It was that sort of the opposite of that, which if you make a mistake, it was a time mistake. They were not gonna go out a business. Their balance sheets were okay and mathematically you know-- You know there is a couple of percent scrappage every year. You know that there is immigration. You know that there household formations of 1.1 million. You know what the existing inventory is. So, the big debate about housing was the so called shadow inventory, the foreclosures and things like that. So, as we look at that, okay, if we're gonna make a mistake, it's because the shadow of inventory is bigger than we thought, but ultimately this has to work. Mathematically, it must work. And Warren Buffet said the same thing many times about this. He's got big exposure to housing and, you know, so we were just copying him in that sense that we came to the same conclusion and had to work. -Right, stock market, you are on record of being bullish on stock market. You think 2013 is gonna be another really good year, how good and why? -I think the stock market with balance sheets the best ever been in corporate Americas history with housing coming back and with the Fed gonna be accommodative toward 6.5% unemployment and 2.5% inflation. Stocks are pretty much the only game in town. What's the big risk in terms of political dysfunction that appears-- most of these risks appeared to have dissipated at least short term. Europe is at risk. China is at risk. Israel is at risk. There's always risk. -Right. -But given that there's always risk, I think stocks are basically where you have to be. -So, which stocks? Do we have to be in, Bill Miller. Do you have to be in-- I've got to ask you about Apple. You know, disappointing earnings report recently. So, what's your take in Apple? -The Apple is the Dr. Jekyll and Mr. Hyde of the stock market. It's Dr. Jekyll in the sense that they are one of the greatest product innovators creating products that people love and a brand that people love. And they are Mr. Hyde in their completely idiotic and dysfunctional capital allocation, which is the worse probably in the history corporate America among good companies. So, they have 135 billion dollars of cash. They have much more cash than Amazon has market cap. Tim Cook said when they had 90 billion of cash, it was way too much that no possible reason to use, announced the modest dividend and modest share buyback that would not even draw down the cash at all, not 1 dollar. -Uh-huh. -A year later 135 billion of cash. Cash is equity. Equity has a cost. The cost of equity if you're optimistic like me it's 6%. If you're historical like others it's 8%, so take 6 or 7 or 8% multiplied times 130 billion dollars, that's how much they're destroying value every year with damn capital allocation. They could double the dividend tomorrow and so the big share by back and never touch the cash. So, Apple is a case where when the company had a massive growth rate and still got a good growth rate. The stock went up because people didn't care about the bad capital allocation. -Right. -But now, it's in the Microsoft camp. Now, it's in the Cisco camp. -So, it's there. It's that kind of mature. -Now, the market is saying as the market is taking Microsoft's multiple down every year, why do you have 85 billion dollars of cash? You generate 2 billion a month, why? Why you're raising the dividend 25% a year instead of 15? Why don't you buy back stock? And so, I think, that's the dilemma with Apple, and I think Apple is $450 a share, has huge optimality. It's 9½ times earnings. You know, it's gonna grow probably 15 to 16% this year consensus, 12 to 14 next, and Coke grow 6 to 8% in trade of 17 time earnings. So, if you know, if Apple did what had a capital allocation, I mean, like IBM or like McDonald's. McDonald's pays out 100% of free cash flow to share holders, trades at 15 to 16 times. Apple would be up 50 on just sensible capital allocation. -From you lips to Tim Cook's ears.