Bill Miller's Value Bets

You can't accuse Bill Miller of equivocating in his outlook for the stock market in 2007. When we reached the famed Legg Mason fund manager on March 14, he told us: "It's hard to find a better environment for equities than we have right now. I'll be surprised if the market's not up in the double-digits this year."

Why is he so optimistic? Miller points to solid corporate balance sheets, high returns on equity, huge share buybacks, a robust buyout market, strong global economic growth, tame inflation and low interest rates.

What about the recent market volatility? "It's just noise, in my opinion," he says. The abnormality, he says, was the fact that the market never corrected even two percent during the long ascent that started last summer. "After the Fed stopped tightening, the market was up in an almost linear fashion," he says. If you missed the chance to buy last summer, this sell-off is a "gift" to climb back into the market, says Miller, who is best known as the manager of Legg Mason Value fund (symbol LMVTX), which saw its remarkable 15-year streak of beating Standard Poor's 500-stock index end in 2006.

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So where does Miller see value? Among cyclical plays, he finds homebuilders irresistible at these prices. Many are trading at or below book value (assets minus liabilities), compared with a price-to-book ratio of 1.6 in normal times. His newer, smaller and more flexible Legg Mason Opportunity Trust (LMOPX), a member of the Kiplinger 25, is populated with such homebuilders as Centex, Lennar, Pulte Homes and Ryland.

But his largest industry holding is in steel, which he calls a long-term structural story. Miller says global consolidation in steel is making the business less cyclical and prone to excess capacity. The industry's price discipline is boosting free cash flows. Opportunity holds United States Steel, AK Steel and Dutch-based Arcelor Mittal.

Another one of Miller's large contrarian wagers is the unloved Eastman Kodak. Not only is the company reaching the culmination of an extensive restructuring plan, but he believes its new inkjet-printer technology will be a game-changer. "We think it will be disruptive to HP and Lexmark," says Miller, who thinks Kodak shares are worth twice the $22.84 they closed at on March 15.