'Worst' Over, Miller Says

Legg's Star Money Manager Expects Technology, Financial Stocks To Thrive In Recovery

July 23, 2009|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com

Legg Mason star money manager Bill Miller believes the "worst has passed" in the stock market and the economy, and predicted that technology and financial stocks should continue to perform well in a recovery.

In a quarterly letter to investors of his flagship Value Trust mutual fund released Wednesday, Miller said market performance in the second quarter was a break from the financial collapse that began when Lehman Brothers failed last fall. The Standard & Poor's 500 Index rose nearly 16 percent in the three months ending June 30, while his fund gained 29 percent, reversing two years of dismal performance.

"Bull markets typically begin when the following four conditions are present: The economy is bottoming, profits are bottoming, the Fed is stimulating and valuations are low," Miller wrote. "That's where we are now."

A Legg spokeswoman said Miller was not available for comment.

Miller pointed to the technology sector as a bright spot in the market, noting the performance of IBM, which has continued to post record earnings.

"If this economy can't hurt it, it's hard to see what can," he said. "The technology sector, on average, has a great balance sheet, is flush with cash and trades at a large discount to the market on a free-cash-flow yield basis. It should continue to perform well."

Moreover, Miller noted financial stocks, which he said have been "leaders off the bottom, just as they were off the bottom of the last banking crisis in the late 1980s and early 1990s."

Although banks still face growing credit losses in the next year, Miller said that should not impede their performance. Recent earnings for Goldman Sachs - which recently reported its largest quarterly profit in its history as a public company, of $3.44 billion - may be a preview of things to come in the sector as the economy recovers, Miller said.

Still, Miller cautioned that the market and economic recovery could reverse, citing rising interest rates, a sharp rise in commodity prices, especially oil, and policy errors by the federal government as three risks.

Miller gained his stellar reputation after the Value Trust beat the S&P 500 index for 15 consecutive years before the record was snapped in 2006. Since then, the fund had been struggling as it lost 55.5 percent in 2008.

Besides a turnaround performance in the second quarter, the Value Trust has done well during the first half of the year with a 13.98 percent return.

The fund's holdings include Yahoo and Google as well as financial stocks such as Goldman Sachs.

The Value Trust's gain was "due largely to our staying the course with names that hurt us last year, which were very cheap and got deeply oversold, and which began to rebound as it became clear that financial Armageddon had been avoided," Miller said.

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