It used to be that when Bill Miller, the vaunted value manager at Legg Mason Inc. of Baltimore, gave his view of the market, it would be hard to find folks who would disagree with him.
However, two years of underperformance of the $18.95 billion Legg Mason Value Trust, of which he is manager, have made such disagreements more commonplace.
Not everyone is ready to believe that — as Mr. Miller suggested in a Nov. 1 letter to shareholders — now may be a good time to buy beaten-down financial and consumer stocks.
"Just as the right thing to do in 2002 was to buy what everyone was panicked about, I think the greatest gains over the next five years will be made in those securities people are panicked about today," he wrote.
Mr. Miller singled out Countrywide Financial Corp. as an example. The Calabasas, Calif.-based company fell below $15, from a high in January of $45.
"A careful analysis of Countrywide's long-term business value," however, suggests that that the stock should make it back into the $40 range, Mr. Miller said.
Although that may happen eventually, said Daniel H. Frascarelli, a partner with
Lord Abbett & Co. LLC of Jersey City, N.J., it seems too early to start buying beaten-down financial stocks such as Countrywide when there could still be a few surprises left to the subprime-mortgage mess.
It could take three or four years for such stocks to become leaders, said Mr. Frascarelli, who manages the $1.13 billion
Lord Abbett Large-Cap Core Fund.
There still could be companies that see their stocks plummet as a result of their exposure to the subprime mess — as was the case with
Citigroup Inc. and Merrill Lynch & Co. Inc., both of New York — he said.
"I don't want to get caught in a Citi or a Merrill," Mr. Frascarelli said.
And it is also still too early to invest in consumer stocks, he said.
It goes back to the subprime-mortgage mess, Mr. Frascarelli said.
It has become much harder for people to refinance their homes, putting a damper on one of the chief sources of capital used to finance consumption, he said.
At least one financial adviser agrees. "Consumer discretionary spending is at great risk because of the decrease in cash refinancing available," said J. Michael Martin, president of Columbia, Md.-based Financial Advantage Inc.
He also agrees that it is still too early to jump into financial stocks.
"Color me skeptical on financial services," Mr. Martin said. "I think there's an awful lot that's unknown yet about the extent of the [subprime] problems."
The Legg Mason Value Trust isn't a fund Mr. Martin said he uses. But if he did, he would be disturbed by Mr. Miller's opinion of the market, he added.
At the moment, Mr. Martin said, he would prefer that a manager move more assets to cash until it could be determined with more certainty whether beaten-down stocks would come back.
Other industry experts, however, expressed the belief that Mr. Miller — whose Legg Mason Value Trust beat the Standard & Poor's 500 stock index 15 years running until last year — is right to assume that financial and consumer stocks will rebound.
"I couldn't possibly agree more," said Charles Lieberman, strategist and chief economist with Advisors Financial Center LLC in Paramus, N.J. Financial stocks in particular have been beaten down to the point where it probably makes sense to begin to look at them, as it is unlikely that they will go down much further, he said.
That is one reasons why he is reviewing
Citigroup, Mr. Lieberman said.
"Bad news is going to make its way into the public domain," he said. "But you get to a point where stock prices have fallen enough, they are discounting far worse news than is likely."
If that is the case, Mr. Miller could be setting his fund up to outperform once again.
That would be quite a turnaround.
The fund's 3.2% year-to-date return through Oct. 31 placed it in the 97th percentile of its large-blend category, according to Morningstar Inc. of Chicago. Its one-year return of 7.58% placed it in the 95th percentile, and its three-year annualized return of 9.52% placed it in the 94th percentile.
Now isn't the time, however, to abandon the fund, according to Morningstar.
"We see no reason to believe Miller has permanently lost his touch," Morningstar analyst Greg Carlson wrote in a September evaluation of the fund.
David Hoffman can be reached at [email protected].
