Bill Miller Likes Telecom -- if He Likes Anything, That Is

The once-robust telecom-stock fan club can count today's Peter Lynch among its thinning ranks, but even he hardly thinks happy days are here again.

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Bill Miller added the ravaged shares of telecommunications equipment makers Tellabs(TLAB) and Corning(GLW), both down more than 70% over the past year, to his (LMVTX)Legg Mason Value Trust fund in the second quarter, according to a shareholder report filed with regulators Tuesday. Miller first noted his budding taste for telecom stocks, which he sees as three- to five-year holdings, at investment conferences in May and June, and the filing shows he put his shareholders' money where his mouth was.

Miller's purchases will no doubt lead some to think the sector's free-fall is over, but that ignores the real chance that Miller -- like many value investors -- is early. He added telecom service provider Level 3 Communications (LVLT) to the fund in the first quarter, for instance, and it was his fund's biggest loser in the second quarter, with a 68% fall. Rather than short-term plays, these are five-year picks in an area that Miller concedes in his letter to shareholders has been plagued by "a rash of bankruptcies, regulatory uncertainty, technological confusion, overcapacity, declining sales and collapsing earnings."

Brave Man Telecom is about as far as you can get from the market's sweet spot right now
Second-Quarter Additions
Stock	Percentage of Net Assets	One-Year Return
Tellabs	1.8%	-73.3%
Corning	1.2	-79.8
First-Quarter Addition
Stock	Percentage of Net Assets	One-Year Return
Level 3 Communications	0.8%	-93.3%
Sources: FreeEdgar.com and Baseline/Thomson Financial

Here's why Miller's opinion matters: He's the only fund manager to beat the S&P 500 in each of the past 10 years, and he's ahead of the benchmark again this year. While Miller isn't infallible, his enviable streak earned him Morningstar's Manager of the Decade honor of the 1990s. His public support of a stock has an E.F. Hutton quality, thanks to his reputation for picking winners like America Online when its success seemed far from certain.

The Streak Miller is the only fund manager to top the S&P 500 in each of the past 10 years
	(LMVTX)Legg Mason Value	S&P 500
YTD	2.5%	-7.7%
2000	-7.1	-9.1
1999	26.7	21
1998	48	28.6
1997	37.1	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
Source: Morningstar

Miller's interest in these telecom shops is fired by his belief that the economy and corporate profits will start growing again over the next 12 months. Given that scenario, he believes today's "deep pessimism" toward telecom firms ignores the potential for their earnings and stock prices to head north with the economy. Still, he's not scheduling any parades just yet.

"We are under no illusions that this area will rebound quickly," he wrote to shareholders. "But we do think that spending [on telecom equipment] will resume by 2003. A rebound that far away has created an opportunity now for patient investors."

While tech and telecom fans weary of losses might be buoyed by his interest, he's hardly smitten with stocks at today's prices. Miller admits that neither tech nor nontech stocks look like a bargain, despite the S&P 500 and Nasdaq Composite's respective 15% and 45% tumbles over the past year.

"'Value stocks are no longer cheap," Miller wrote. "The median price-earnings multiple of stocks with earnings is about 17, compared with 13 a year ago.

"Despite their precipitous decline, most tech stocks are not cheap either," he continued. "All across the tech space, the story is similar: Investors are pricing in growth that reflects growth rates companies have achieved in the past, but not what they are likely to achieve in the future."

The bottom line for investors is that despite the equities market's jaw-dropping losses, even a savvy veteran like Miller is having a hard time finding stocks he likes.

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