The market giveth and the market taketh away. Highflyers can quickly falter into the nether world of losers, and this can apply to stocks as well as investors themselves.
Bill Miller knows this in a very personal, immediate way. From 1991 to 2005, this legendary manager of the Legg Mason Value Trust fund outpaced the market's performance -- even beating the record of Peter Lynch, as The New York Times recently noted. Lynch outpaced the market a "mere" 11 consecutive years between 1977 and 1990.
But, while Lynch got out while on top, Miller hung on -- and during the past six years the market turned against him. With its faltering performance, The Times reports, Value Trust went from a having $20 billion in assets under management to just $2.8 billion today.
Legg Mason just announced Miller will step down from managing this mutual fund, and that prompted me to look at some of the fund's recent holdings. I figured Miller's final picks would likely include some gems. Screening Value Trust's 25 largest holdings through my guru strategies, which are based on the investment ways of Wall Street greats, did in fact reveal several names with very high guru grades.
Ignore Bill Miller at your peril. While the past several turbulent years have been tough for him (and most other investment strategists), his investing prowess over the long term has been firmly established. The stocks below are ones that both Miller and the guru strategies favor, and those are two very good reasons to consider them for your portfolio.
Two strategies in particular like Miller's picks: the one based on Peter Lynch's approach to investing, and the other founded on James P. O'Shaughnessy's strategies.
The O'Shaughnessy screen wants to see market capitalization greater than $1 billion, and positive cash flow per share in excess of the market's mean corresponding number, or $1.39 today. It demands outstanding shares in excess of the market average -- which is currently 614 million shares -- and specifies trailing 12-month sales that are 1.5x greater than the mean of the broad-market figure -- or $19.7 billion at this juncture.
Then, among the stocks that pass the previous four tests, the screen identifies the top 50 based on dividend yield.
The following three stocks are in Miller's portfolio, and all pass the hurdles that the O'Shaughnessy strategy has placed in front of them.
- Pfizer (PFE), the world's largest pharmaceutical company, whose dividend yield is 4.34%.
- General Electric (GE), the behemoth conglomerate, yielding 4.08%.
- Philip Morris International (PM), the world's second largest tobacco company, with a 4.32% dividend yield
The strategy I've based on Lynch's writings is best known for the P/E/G ratio, which is the price-to-earnings ratio relative to growth. Lynch uses the P/E/G to measure the cost of growth to the investor -- a reading of 1.28, for example, means the investor is paying $1.28 for each percentage point of growth. Lynch limits the P/E/G to a maximum of 1.0. Another variable used by the Lynch strategy is the debt-to-equity ratio, with Lynch preferring less debt.
In Miller's portfolio, five stocks earn high grades from the Lynch strategy:
- Microsoft (MSFT), the software giant
- eBay (EBAY), the online auction and marketplace company
- Chevron (CVX), the oil giant
- Annaly Capital Management (NLY), a real estate investment trust
- BlackRock (BLK), the world's largest asset manager