No question he got it right on
. Unless you think buying when that highflier was a bargain and riding it to a 3,500% gain before selling some of it at the peak was a bad call.
Now the guy who aced AOL is eyeing another Internet stock.
Yep, Bill Miller, the only diversified fund pro around to beat the
every year since 1990, is taking a close look at
. And it's a safe bet that when the manager behind
Legg Mason Value Trust's stunning long-term record watches a Net play, you might want to think about it, too.
Of course, the e-tailer, now trading in the low 60s, is still a bit dear for this value investor. Yet he's done a lot of valuation work on Amazon and thinks that when the stock falls into the 40s or 50s, he'll want a piece.
Why? Miller says the online retailing giant's basic book business is reason enough. "The story is simple. They buy books at the same price everybody else does and sell them at the same price
roughly as everybody else. But we estimate they ultimately will be able to deliver an operating margin close to 10% -- about double
Barnes & Noble
. Part of the reason is that those guys have to build really expensive stores. Amazon doesn't."
No, but Amazon's management is building some pretty pricey warehouses, cause for concern to many analysts.
Not this contrarian, however. He applauds the company's $300 million investment in bricks and mortar. "It's not much money in the scheme of things," he says, noting that it's critical to get order fulfillment right. What "they're spending will allow them to scale up to $10 billion in revenue."
But just because he's not afraid of taking a stake in the very volatile Internet sector, don't think Miller works on Net time. He's definitely an investor, not a trader, typically holding stocks from seven to 10 years.
And while we're on the subject of his investing style, let's not quibble about the "value" label, please. Miller is often chastised by those in the more traditional value camp because AOL and
, hardly bargain-basement buys by usual valuation measures, are still top holdings in his fund. But why penalize him for going against the crowd and buying them when they were values? Miller's rigorous value stock-picking strategy, which looks beyond basic price-to-earnings ratios to focus on return on capital, is perhaps better suited than classic models for today's rapidly evolving economy.
Besides, if you put aside Miller's willingness to take big stakes in high tech, many of the stocks in Legg Mason Value's portfolio would fit in much more conventional value funds. He's buying
, the controversial trash-hauler that saw its stock plunge recently on news of accounting irregularities. "We're buying it like a banshee here," says Miller, who admits that one of his biggest mistakes so far this year was to buy it long before it bottomed. "Yeah, it cost us a lot of money," he says.
Still, "at these prices, you don't have to be a wizard to figure out the numbers. We think we've got our arms around this one. It's worth
somewhere in the low 30s." Waste Management closed Wednesday at 20 1/4.
is also on the buy list. "It's worth roughly twice the current price," says Miller. In fact, he thinks the best values these days are in financial services. He also likes
. "It's a great bank -- 24% cash return on equity and management that's delivered terrific returns to shareholders. It should be trading about 40% to 50% higher than it is."
And don't count out
Toys R Us
either, he says. "Yeah, the shopping experience is bad, but returns on capital will bottom this year, and we'll buy it on the way down. They're using excess cash to buy their stock and the newly remodeled stores are really good."
Interested in Miller's top-performing fund? You might want to wait a bit until the Baltimore-based fund firm announces Legg Mason Value's distribution. Miller doesn't expect it to take a big bite, and his tax efficiency is historically quite high. But taking profits on AOL and Dell earlier in the year could put new shareholders at a distinct disadvantage.
Speaking of AOL, Miller believes it's starting to look good again, although since it still accounts for about 10% of his portfolio, he's not buying ... yet. "I mused about it ... if it gets down into the 70s. I think fair value is" around 100. AOL closed Wednesday at 91.
An opinion worth considering. After all, Bill Miller has more than proven his ability to call that stock.
Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at