Radian Group (RDN)

[Enterprising Investor]

It’s Bill Miller, Again (4/08/13)

His Opportunity fund returned 35% for 12 months

By Suzanne McGee

If you looked at the holdings of the Legg Mason Capital Management Opportunity fund six months ago, it might have been hard to envision the fund outperforming all its rivals anytime soon. But one after another, the out-of-favor stock picks of fund managers Bill Miller and Samantha McLemore—Netflix Inc. and Best Buy Co. among them—rallied, sometimes dramatically.

The result: At the end of March, as at year-end, the fund was the top 12-month performer among the diversified U.S.-stock mutual funds in this newspaper’s quarterly competition.

“We aren’t trying to be heroes,” says Mr. Miller. “We’re just identifying and trying to exploit a gap that we see that exists between perception and the reality of value in some of these companies.”

For instance, he says, by last fall shares of Best Buy were “priced for imminent demise” of the company. He acknowledges that Best Buy’s business model has been threatened by the dominance of online shopping for electronics. But he didn’t believe that meant the company was poised for collapse when its founder and former chief executive, Richard Schultze, wasn’t able to put together a buyout proposal that the board found acceptable by the late-February deadline. That proved to matter to investors less than new CEO Hubert Joly’s success in cutting costs and delivering better-than-expected sales, Mr. Miller says. Best Buy’s stock soared nearly 84% in the first quarter of this year in response.

That was one of the turnaround stories that enabled Legg Mason Capital Management Opportunity to generate a return of 21% in the first quarter, bringing its chart-topping gain for the 12 months ended March 31 to 35.4%. The Winners’ Circle contest, based on preliminary numbers from Morningstar Inc., includes diversified U.S.-stock mutual funds with more than $50 million in assets and a track record longer than three years. (It excludes index funds, leveraged index funds and inverse leveraged index funds.)

Netflix soared 98.3% in the first quarter. “It began going up on almost the day we bought it in the fourth quarter; that quick move was a surprise,” Mr. Miller says. The fund’s cost basis for the stock is $65 a share, he says; Netflix was changing hands late last week at about $165 a share.

Some other holdings where Mr. Miller believes the inherent value isn’t reflected in current stock prices include mortgage-insurance companies like MGIC Investment Corp. and airlines including United Continental Holdings Inc., US Airways Group Inc. and Delta Air Lines Inc. And yes, even the beleaguered Apple Inc., which Mr. Miller and Ms. McLemore have been moving back to an overweight position in the fund’s holdings—relative to its weighting in the fund’s benchmark, the Standard & Poor’s 500-stock index—after many months when it was underweight in the fund.

Apple “is where we are most contrarian,” Mr. Miller says. The stock’s price, he says, assumes minimal growth for the company. Its price/earnings ratio is below those of uninspiring companies like grocery retailer Safeway Inc., slow-moving telecommunications giant AT&T Inc. and even Best Buy, whose business model is far more besieged than Apple’s. In Apple, Mr. Miller sees plenty of value that could be unlocked quickly by some kind of catalyst—and he sees plenty of potential for a catalyst, including a likely dividend increase.

http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-205982/