Investment guru Bill Miller says it's safe to come out of the bushes — the bears have been contained.
“The worst has passed in the market and the economy,”
Mr. Miller writes in his latest quarterly commentary to investors. The longtime manager of the Legg Mason Value Trust fund, best known for beating the S&P 500 an unprecedented 15 years in a row until 2005, cites his own set of leading indicators: Bull markets begin, he explains, “when the economy is bottoming, profits are bottoming, the Fed is stimulating and valuations are low. That's where we are now.” And he is adamant that “bargains abound” in the U.S. stock market, mostly because assets in money market funds exceed assets in stock funds for the first time in 15 years. All that cash, he argues, will “gradually move out in search of better returns.”
While the second half of this decade has not been good for Mr. Miller, especially last year's disastrous 55% loss in his Value Trust portfolio, he's making a case for himself this year. Value Trust soared 29% in the second quarter, giving it a 14% return for the year so far, once again clobbering the S&P 500, up 3.2% year-to-date. How did Mr. Miller do it? By investing in—and sticking with—the tech and financial stocks that hammered him so horribly last year. “[They became] very cheap and deeply oversold,” he writes, “and began to rebound as it became clear that financial Armageddon had been avoided.”
One of those stocks is New York City-based Computer Associates, which, despite a 24% tumble last year, remains Mr. Miller's sixth-largest holding at Value Trust. The business software maker's share price last week was around $20, versus $18 in December.
Computer Associates recently added the Nasdaq market to its client roster and last week reported a second-quarter revenue increase of 6% in North America and a 17% increase in its regional businesses. Earnings were flat for the quarter, however, and Mr. Miller's confidence in CA makes him a bit of a contrarian: Of the 14 analysts who cover the stock, only five maintain a buy rating, according to Bloomberg.
Another local favorite of Mr. Miller's is Armonk-based International Business Machines, his fund's 10th-largest holding. IBM shares lost more than 18% of their value last year, but it's a good thing he held on to the tech titan: IBM is up more than 35% this year, to around $117 per share last week.
“In the worst
recession in 50 years and the worst financial crisis since the 1930s, IBM has continued to post record earnings, more than doubling operating earnings per share [and] more than doubling the
dividend,” Mr. Miller writes. “If this economy can't hurt it, it's hard to see what can.”
As for financial stocks, he's so bullish on them he recently bought another 500,000 shares of
Goldman Sachs Group and acquired 200,000 additional shares of J.P. Morgan Chase, bringing Value Trust's financial-stock holdings to nearly 5% of total assets. (Other big New York names in his portfolio include NYSE Euronext, Time Warner Inc. and Eastman Kodak.)
Mr. Miller calls financial stocks the “leaders off the bottom,” meaning they will be the first to float when the market tide rises. The disappearance of Bear Stearns, Lehman Brothers, Washington Mutual and Wachovia also mean less competition for the survivors. His favorite things about financial stocks right now? “They are under-owned, widely disliked and very inexpensive on a price-to-book-value basis.”
