Even after two consecutive down years for the S&P 500, the fund world's heavyweight champ just isn't excited about stocks.

Bill Miller, manager of the ( LMVTX) Legg Mason Value Trust fund and the only fund manager to top the S&P 500 in each of the past 11 years, filed a decidedly dreary shareholder report with regulators on Tuesday. In his year-end missive, he pronounced stocks "fairly valued" at today's prices and called for companies to offer investors more truth and less spin.

The bargain hunter, named manager of the decade by Morningstar at the end of 1999, called for a solid economic recovery in a year-end press briefing. But his shareholder letter posits that stocks' rebound in the fourth quarter erased many undervalued opportunities.

The upshot: Miller didn't add a single name to the Value Trust fund's portfolio in the fourth quarter. His moves -- or lack thereof -- in the fourth quarter certainly don't lend much credence to the widely made argument that fallen stocks are a bargain.

"The problem is that even after two down years, the market is, we think, roughly fairly valued," he writes. "The 20% or so rise since the stock market's low on Sept. 21 has removed most of the undervaluation then present, while leaving many highly visible names, especially in technology, expensive."

Miller does point out areas he believes will offer above-market gains. In addition to financial stocks and supermarket stocks, which he says are underappreciated, he highlights an eclectic blend of "underpriced growth stocks" and some cyclicals. As usual, he's looking at companies he thinks are misunderstood or suffering temporary woes.

He says companies such as UnitedHealth Group ( UNH), Waste Management ( WMI) and Fannie Mae ( FNM) "should be worth significant premiums to the market, yet all trade at discounts" to the market. He believes each can grow its earnings at a 10% annual clip, meriting investors' trust and money these days.

His cyclical picks illustrate his penchant for investing in companies that most tech-light, stodgy value types would shun: Amazon.com ( AMZN), Nextel ( NXTL), Eastman Kodak ( EK) and Lucent Technologies ( LU). On average these stocks are down 46% over the past 12 months. In each case he argues that they're suffering from the economy's temporary malaise or investors' misperception of their business model.

Among this group, Miller backs Lucent's new chief executive, Pat Russo; he raised the fund's Amazon.com share balance from 30 million shares to more than 31 million shares. As a firm, Legg Mason is the largest holder of Amazon.com's stock and bonds.

But all these stocks were already in his portfolio. Miller spends much of his letter railing at the Wall Street machine in the wake of Enron's accounting scandal. His beef: Companies' efforts to boost returns with fuzzy math and overzealous outlooks -- along with Wall Street analysts' tendency to provide low earnings hurdles -- have obscured companies' true growth and made it tough for investors to figure out what companies are worth.

"The incentives of management, of the company's auditors, of the board, and of Wall Street analysts and investment bankers were all to perpetuate the perceptions of strong growth, while obscuring the costs of that growth," Miller writes.

His prescription: Companies should "stop manipulating accounting rules" and stop giving guidance, because it's too often inaccurate. Rather than try to predict what they'll earn for the next few years, he suggests they stick to explanations of the company's business model and expected margins and how the current quarter looks.

In his letter, today's Peter Lynch is reminding us of something we've all learned over the past few months: Maybe honesty is the best policy.

Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to imcdonald@thestreet.com, but he cannot give specific financial advice.

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