The Morningstar Conference: Value in Telecom? Legg Mason's Miller Thinks So

CHICAGO -- The czar of value investing has a rosier outlook for stocks than the czar of bond investing -- but he's not necessarily planning any parades, either.

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Speaking to a pack of reporters at the 2001 Morningstar Investment Conference in Chicago, value maven Bill Miller said he expects corporate profits to rise 6% to 8% next year, implying stock prices could follow suit or go even higher. That's better than the projection for 5% annual growth in stocks and bonds made by bond-fund guru Bill Gross earlier Tuesday. Miller, whose (LMVTX)Legg Mason Value Trust is the only mutual fund to top the S&P 500 in each of the past 10 years, called Gross' prognosis "a little pessimistic." He also is finding some value opportunities in the most unlikely of places: telcos.

Speaking briefly Tuesday, ahead of a broader Wednesday presentation, Miller said he sees the potential for modest stock gains in the next couple of years. The reason: Investors aren't considering that falling interest rates could spur economic growth and corporate profits, perhaps projecting the economy's current malaise too far forward.

"We do believe that there are sufficient tools between monetary and fiscal policy for the economy to begin growing in the next year or so," Miller said. "But the market is aware that we have a crummy economy and crummy earnings."

Miller believes the Federal Reserve will continue slashing interest rates as long as the economy is growing slower than 3.5% or 4%.

Given that outlook, he's focusing on the market's most battered sector -- telecommunications. That might buoy the spirits of tech and telecom fans, but his interest doesn't translate to overnight success. Miller typically buys shares with a multiyear time horizon, trying to buy at a deep discount to his estimate of fair value based on future free cash flows.

"Telecommunications is massively overbuilt, so that's where we're spending our time," Miller said. "The maximum pessimism for telecom is coming soon if we haven't seen it already."

While the fiber-optic stocks have been under pressure due to a glut of inventory, Miller sees the current pessism as overdone.

"What's the current level of excess capacity? I think it's under debate," he said. "Will the demand for bandwidth and telecom go down? No, the most conservative estimates say demand is growing at 80%. At that rate, we should burn through that [excess] capacity in two years."

The telecom stocks Miller has bought recently are Corning (GLW) and Tellabs (TLAB). In his (LMOPX)Legg Mason Opportunity fund he's recently bought trounced junk bonds issued by Exodus Communications (EXDS) and Level 3 Communications (LVLT).

Junk Pile

Of course, Miller was asked about his most controversial pick, Amazon.com (AMZN). And, of course, he has an opinion.

"We have a Amazon valued at about $30," he said. "If all goes as well as it can possibly go, it could go to $100. If all goes as badly as possible, it's worth about $12." In Wednesday morning trading, Amazon was up 6.1% to $14.06.

Miller said he and his team expect Amazon to be "slightly cash-flow positive" next year. He also points to a potential credit upgrade from Moody's in the next couple of quarters.

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