Bill Miller of Legg Mason (LM), one of the most famous value investors today, told the United Kingdom’s Telegraph newspaper that he believes the market is headed higher. It is his belief that the market is underestimating US GDP growth in 2010, which could lead to equity market gains of as much as 20%. While most economists are expected growth to come in somewhere between 2% and 4%, and the consensus is about 2.6%. Miller thinks the US economy could grow at a faster rate, possibly as high as 8%.
“He tips technology and financials to be the two sectors most likely to benefit from any upturn and has positioned his portfolio to make the sectors his biggest and second biggest respective weightings.
He says financials are at their most liquid since the 1930s and that the companies that have survived the last two years’ market dislocation are now well placed to grow their market share.” The London Telegraph 1/6/2010
Miller has a mixed track record in recent years as his value based fund (Legg Mason Capital Management’s Value Trust) was hit very hard by the credit crisis. His reputation has been restored since then with his bets on the financial industry as the market has recovered. Last summer, he called financials his favorite investment for the rest of the decade, so it should be no surprise that he remains bullish on the sector. He was too bullish as the credit crisis destroyed a lot of shareholder value, but he was correctly aggressive when most others were not early last year.
At Ockham, we follow a value-oriented methodology, yet we reach a very different thesis when it comes Miller’s favorite sectors. We wrote about technology in particular yesterday (Encore for the Tech Sector in 2010?), and we think that these two sectors (tech and financial) have seen prices appreciate well ahead of earnings. It seems that the risk reward tradeoff favors caution and profit taking in many of these stocks. Perhaps if Miller is correct and the US doubles or more the consensus growth expectations, then he is probably right about a continued bull market in financials and technology stocks. However, that sort of growth is a huge “if”. That is not to say that these sectors will not out perform the market, but there seems to be better value plays present in other sectors of the economy right now.