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February 5, 2013 5:25 pm
Investors have Apple all wrong, according to Bill Miller. The best performing mutual fund manager last year thanks to big bets on unloved stocks, he says the world’s largest listed company could be worth 50 per cent more.
The technology giant’s share price has dropped more than a third from its September peak, as earnings growth has faltered. “Most people are worried about Apple perhaps ending up like Nokia or RIM, once-hot product companies that have fallen on hard times,” says Mr Miller.
In his opinion, “Apple is much more like Nike, a consumer brand with great loyalty”. It is a typically contrarian and optimistic view from the 63-year-old former military intelligence officer, who appears to be enjoying a second youth as stock picking comes back into fashion, rescuing a reputation as both one of the best and one of the worst investors of recent decades.
From 1991 to 2005 Mr Miller beat the US stock market every year in an unmatched 15-year run at the head of Legg Mason’s flagship mutual fund.
The financial crisis was unkind, however, and when in late 2011 he announced he would step down it was the worst performer over five years, behind more than 800 peers, according to Lipper, a research group.
Mr Miller did not retire though. He continued to run the $1.1bn Legg Mason Opportunity Trust, and last year produced a blistering 40 per cent return for its investors as the unloved housebuilders and financial stocks he favoured came back into fashion.
A value investor, but one with an eye for growth, he says housing was the biggest contributor to his success last year, after he snapped up stocks such as PulteGroup during the market turmoil of 2011.
Such wild opportunities are not on offer today. “The stocks are maybe a little bit ahead of themselves,” says Mr Miller. But he invokes the opinion of his co-portfolio manager Samantha McLemore: “Try and find another sector where you can pretty much guarantee at least 25 per cent earnings growth a year for the next five years.”
Indeed, while that view is based on fundamental improvement in the housing market, with land prices up, rising prices in most cities and “affordability at a 50-year low”, Mr Miller predicts a building boom that will rival the last bubble in its magnitude.
He says there is a big structural demand for homes due to a growing population and a lack of building during the bust, when fewer than 500,000 new homes a year were built. The long-term trend is for 1.4m to 1.5m new homes a year, so to catch up “we probably need to get to 2m housing starts at some point in the next five years”.
Such long-term optimism is in part what helped the value investor to embrace technology in the 1990s, and he remains a fan of the big technology names “priced with no regard to the underlying fundamentals”.
For instance, were Apple to keep all $137bn on its balance sheet and just put future free cash flow into the dividend, “that alone would put the stock up close to 50 per cent”.
Cash too, he sees as a solution to concern about Microsoft and the death of the PC business. “Just like any large trend, people have a tendency to overdiscount it. It's a mature business without a great deal of innovation, but it’s a type of business that's going to be around for a long time.”
The company has raised its dividend by 15 per cent annually for five years, but “Microsoft has $85bn in cash and no stated capital allocation policy”. If it were like the more shareholder-friendly Texas Instruments, which aggressively bought back stock during the crisis, it would at least be valued in line with the broader market, he says.
Mr Miller embraces stock market darlings as well though, continuing to be a fan of Amazon, the online retailer that has put expanding its sales far above actual profits. Mr Miller says the opportunity in web services could be at least as big as the company’s retail business and operating margins near zero could be 10 per cent in the long term. “By the end of this year, the start of next year, I think margins will start to rise again,” he says.
The investor does think his job has become harder. “High-frequency trading has added a lot more noise to the market. Two-thirds of activity has nothing to do with fundamentals,” obscuring price signals by real money buyers and sellers.
But Mr Miller says it is “becoming a better environment for stock pickers. When the world is preoccupied with macro the way we tend to invest doesn’t add much value.”
And to that end, his chief concern remains the chance of a Washington-inspired upset as negotiations continue to raise the debt ceiling and agree spending cuts. “The biggest threat to the markets and the economy is Congress.”
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