Miller: tax cut plan a stock boon
NEW YORK (Reuters) - Legg Mason Inc's Bill Miller, the star stock picker who was hammered by the recession, is bullish once again on stocks because of President Barack Obama's tax cut plan and the stimulus it will provide to the U.S. economy.
Miller, famous for beating the returns of the S&P 500 Index for 15 straight years and then crashing spectacularly in 2008, believes U.S. stocks are undervalued by 20 to 30 percent and under appreciated by institutional and retail investors.
Using a calculation called Present Value of Growth Opportunities, which normally shows about one-third of market value is pricing in expectations of future growth, Miller said that metric is low.
"Right now, the S&P 500 is pricing in zero growth, even though manifestly earnings growth has been jugging along very nicely for six quarters. The market is valued as if there would be no more growth forever," Miller said in an interview at the Reuters 2011 Investment Outlook Summit.
Until share prices climb higher, many investors will stay out of the stock market, Miller said.
"What people aren't paying enough attention to right now is the U.S. is uniquely and powerfully positioned relative to the rest of the world. That is, we are following economic policies that are far superior," Miller said.
The euro is acting as a modified gold standard, forcing deflation and austerity on European countries in economic trouble, Miller said.
But the United States has latched onto what he called a Keynesian prescription, increasing government spending to spur economic growth.
Miller hailed Obama's compromise to extend Bush-era tax cuts for two years and implement a 2 percent employee payrolls tax cut, calling it "a very big deal."
The tax cuts could add between one half to three quarters of a percentage point to gross domestic product in 2011, he said.
The tax cuts are good for jobs and the stock market, and would likely force the Federal Reserve to raise interest rates sooner than expected, which has been reflected by a rise in bond yields this week, he said.
Miller, who likes out-of-favor stocks, said financials and big tech companies should do well next year. The KBW Bank Index is trading at below book value, a rare occurrence. Yet 25 percent of 2011 earnings growth in the S&P 500 will be driven by four banks: Citigroup Inc, Bank of America, JPMorgan Chase & Co and Wells Fargo Co
Miller said that in addition to Bank of America, tech heavyweights Cisco Systems Inc and Intel Corp represent great value.
Miller's flagship Legg Mason Capital Management Value Trust is underperforming 98 percent of its peers year to date as of Tuesday, according to Lipper Inc, a unit of Thomson Reuters Corp.
The fund, however, rose 40.6 percent in 2009, beating the S&P 500 index. Miller said he expected the fund to underperform in 2010 as managers rotate their portfolios.
"I didn't expect we'd be down this much relative to the market because I didn't expect the rotation would be this strong," he said.
"But what I did expect was the groups that did really well, the best groups last year, would not be the best groups this year. So the top groups last year are among the bottom groups this year," he said.
(Reporting by Herbert Lash)
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