The Man Who Beats the Market Declares Tech Is Good

The fund world's czar of value investing is nibbling at tech again.

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On Wednesday Bill Miller, whose (LMVTX Quote)Legg Mason Value Trust is the only fund to beat the S&P 500 in each of the past 10 years, filed the fund's latest shareholder report covering the first quarter and talked stocks at the Tomorrow's Childrens' Fund Investment Research Conference in lovely midtown Manhattan.

The upshot: Today's premier mutual fund manager, who sharply reduced his fund's tech weighting last year, is starting to shop in that tattered and mercurial sector despite sagging earnings and a winded economy.

"Everyone who isn't in a coma knows things are bad right now," Miller told an audience of professional and amateur investors at the conference. "We see a recovery of earnings late this year or next and we've started buying distressed telecom and technology names."

This echoes the commentary in Miller's characteristically plain-spoken letter to shareholders, where he writes that the "shift to non-tech [stocks] reached extreme levels in March and early April, and [we] believe that good values have again begun to appear in the technology sector."

Certainly, the impressive run-up in the Nasdaq Composite -- it has climbed 32% since April 4 -- means Miller isn't the only person out there who's cottoned to technology lately. But because of his unparalled performance as a stock picker, his stance carries great weight with Wall Street and lends credence to the recent uptick in bullish sentiment.

The names he names: Tellabs(TLAB Quote), Exodus Communications(EXDS Quote), Corning(GLW Quote) and Level Three Communications(LVLT Quote). The audience frantically scribbled them down or committed them to memory in deference to Miller's enviable track record.

Miller, a former military intelligence officer who pursued a Ph.D. in philosophy before managing money, is loath to toot his own horn. But his fund's record is eye-popping. More than 270 other stock funds have had the same manager for the past 10 years, but none are even close to matching Miller's S&P-beating streak. The fund is up 5.1% so far this year, leading the S&P 500 by a nine percentage-point bulge, according to Morningstar. The Chicago fund-tracking firm awarded Miller its Manager of the Year honor in 1998 and named him Manager of the Decade for the 1990s.

Miller has run the fund since its 1982 launch, ringing up an average annual gain of 21.8% over the past 10 years and 26.5% over the past five years. Both trounce the S&P 500 and top all of the fund's big-cap value fund peers, according to Morningstar.

The Streak Miller is the only fund manager to top the S&P 500 in each of the past 10 years.
Year	Miller's Performance	The S&P
YTD	5.8%	-4.1%
2000	-7.1	-9.1
1999	26.7	21
1998	48	28.6
1997	37	33.4
1996	38.4	23
1995	40.8	37.5
1994	1.4	1.3
1993	11.3	10.1
1992	11.4	7.6
1991	34.7	30.5
Returns through May 8. Source: Morningstar.

Miller didn't get this Peter Lynch-like mantle by meekly sticking to the traditional metrics followed by most value fund managers. These bargain-hunters typically focus on companies with low price-to-earnings multiples vs. their peers or the broader market, often shunning the pricey and volatile tech bin.

Instead, Miller and his team look for companies churning out buckets of free cash flow, focusing on companies whose shares are under pressure for setbacks they see as temporary. Like most value managers, this has led to an overweighting in financial stocks, but it has also led to significant and controversial positions in pricey companies like AOL Time Warner(AOL Quote) and Amazon.com(AMZN Quote). And it has led to solid returns, making his shareholder reports a must-read.

Miller had kept an overweighting in tech stocks since 1995, but ratcheted down his exposure when fund managers of all flavors hopped on the tech gravy train last year. In both his shareholder report and his presentation on Wednesday, Miller explained why he's interested in tech again: Investors were too bullish on tech last year and they're too bearish now.

"One of the most powerful sources of mispricing is the tendency to overweight or overemphasize current conditions. A year ago investors were unduly optimistic because the economy was strong and corporate profits were growing at double-digit rates while inflation was low," he writes to shareholders. "[Now] it is not a secret that technology investment spending is under severe pressure and that the sector suffers from short-term inventory and intermediate-term capacity problems. These difficulties are well publicized and well discounted in the market."

What isn't discounted, he said at the conference, is an uptick in corporate earnings later this year or in 2002. Despite the significance of this call, Miller's moves haven't been drastic.

For the most part he added new money to the 36 stocks in the fund's portfolio, maintaining a 38.3% stake in the financial sector, more than double the sector's weighting in the S&P 500.

Miller Heavy Here are the sectors that have the heaviest weighting in Miller's fund
Top Three Sectors: March 31, 2001
Financial Services	38.3%
Consumer Staples	15.5
Consumer Cyclicals	13.8
Top Three Sectors: Dec. 31, 2000
Financial Services	38.3%
Technology	15.8
Consumer Staples	13.6
Source: Legg Mason and FreeEdgar.com.

A few moves were intriguing. At the end of last year the fund owned 19.2 million shares of struggling online bookseller Amazon.com. The stock lost more than a third of its value in the first quarter after losing 79% last year. Miller bought more than 10 million shares in the first quarter, keeping the sagging stock's weighting in the fund at 2.5%.

First-Quarter Moves
Added
Company	1-Year Return	Forward P/E Multiple
Level 3 Communications (LVLT Quote)	-81.9%	N/A
S&P 500	-12	22
Deleted
Aetna (AET Quote)	-10.1%	71
WorldCom (WCOM Quote)	-58.1	16
S&P 500	-12	22
Source: FreeEdgar.com and Baseline/Thomson Financial. Data through May 8.

At the same time he started a modest 0.2% position in Level 3 Communications, according to the shareholder report. In his Wednesday presentation he also noted that he's been building positions in Tellabs, Exodus Communications and Corning, without specifying whether he was adding the stocks to Legg Mason Value or the more concentrated (LMOPX Quote)Legg Mason Opportunity fund, which he also runs. These three stocks, down an average of 52% over the past 12 months through Wednesday's close, weren't included in either fund's portfolio on March 31, according to regulatory filings.

While Miller's overall tech stake went from 15.8% at the end of last year to 12.3% on March 31, he did boost Dell Computer's(DELL Quote) weighting from 1.6% of the portfolio to 3.1%, through performance and some buying. Despite its 6.6% fall in the first quarter, Miller bought enough shares of sputtering PC shop Gateway(GTW Quote) to keep it at about 2.6% of the fund. The company is smarting from a collapsing consumer PC market and has posted big losses in the past two quarters, but Miller thinks the $18 stock could hit $30 by next year if new management delivers on its promises.

Though he sold more than 380,000 shares of AOL Time Warner, the stock's 15.4% gain in the first quarter boosted its weighting to 5.7% from 5.2% at the end of last year.

A look at the fund's best and worst one-year picks over the past year ending March 31 shows the vicious beating Miller absorbed in several of his tech, media and Net faves, including Amazon.com, Gateway, Dell and AOL Time Warner.

Hits and Misses
	12-Month Return Through March 31
Health Net	157.1%
Washington Mutual	106.6
United Health Group	98.8
Waste Management	80.5
Toys R Us	69.5
S&P 500	-23.5
	12-Month Return Through March 31
Amazon.com	-84.7%
Nextel Communications	-80.6
Gateway	-68.3
Dell	-52.4
AOL Time Warner	-40.3
S&P 500	-23.5
Source: FreeEdgar.com.

Miller isn't on a buying spree and warns investors not to confuse a stock that's well down from frothy heights with a value opportunity.

Case in point: When the subject turns to tech behemoth Cisco Systems, 1999's can't miss networker whose shares are down more than 66% over the past year even after a great April, he's not smitten. The stock sports a 47 forward price-to-earnings multiple, more than twice that of the S&P 500.

"I've talked to some value guys who told me they're buying Cisco now," he said at the conference. "I think Cisco is really scary here."