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Baltimore, MD,-based Legg Mason Capital Management, LLC, headed by Chairman and Chief Investment Officer Bill Miller, manages $12.4 billion in mutual funds and separate accounts. Miller is a legendary investor and in November 2006 was profiled by Fortune Magazine as, “The Greatest Money Manager of our Time.”
Starting in 1991, Bill Miller outperformed the stock market for 15 straight years, through the tech bull market, then the crash and the recovery. This is a feat so rare that based on the percent of equity funds actually beating the market, the probability of any fund beating the market for 15 straight years ending in 2005 was calculated as 1 in 2.3 million.
He has been named as a member of the “Power 30” by SmartMoney and by Barron's in 1999 to its “All-Century Investment Team.” He has been called as one of the “Heroes of Value Investing” by BusinessWeek. Over the last few years, however, his performance has lagged behind the S&P 500 since 2007, but with an average holding period of up to eight years, it is probably too early to count out this value investing guru.
LMCM’s investment approach is based on exploiting pricing inefficiencies when the diversity of thought breaks down as when investors panic or get greedy all at once, as well as when the time horizon extends beyond the market’s often myopic frame. They do this via a disciplined process of generating ideas, analyzing them based on competitive position and strategy, and the optimal construction and management of portfolios. The fund holds a diversified portfolio of 374 positions, and about 75%-80% of holdings are in large-caps, another 15% are in mid-caps, and small-caps account for the remaining 5-10% of holdings. The portfolio turnover is around 20%-25%, but historically it has been 10%-15% implying an average holding period of five to eight years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight in the financials, technology and services sectors, and it is under-weight the basic materials, energy and industrial sectors.
The following summarizes the new picks and pans in the latest reported 13-F filing for the March 2011 quarter, and updated based on 13-G filings since the end of the quarter:
  • AES Corp. (AES) is engaged in the generation and distribution of electricity to over 12 million customers worldwide. Legg Mason initiated the position in late-2007 probably in the low-$20s, and has been on the wrong side of this position ever since as the stock has continued to be weak, dropping below $6 during the 2008/09 crisis and trading currently in the $12 range, so its selling half the position from the prior quarter does not carry much informative value.
  • Apple Inc. (AAPL) manufactures personal computers, mobile communication devices, and portable music players. The position was initiated in early 2009 probably in the $90s, so the additional $143 million buy in the mid-$300s during the quarter on top of the previous $89 million holding is a huge conviction buy.
  • Celgene Corp. (CELG) develops therapies to treat cancer and immune-inflammatory related diseases by regulating cells, genes and proteins. This is the largest initial buy during the quarter at $143 million, and is an indication of its conviction in this buy.
  • Blackrock Inc. (BLK) manages fixed income, cash, equity and alternative investment products for institutional and individual investors. The position was initiated in mid-2009 at prices slightly below current levels. It is a large add-on $133 million conviction buy during the quarter on top of the $67 million holding from the prior quarter.
  • Target Corporation (TGT) operates 1,750 Target and SuperTarget stores across the U.S. offering everyday items, food and fashionable merchandise. This is a large initial conviction buy of $129 million during the quarter.
  • NYSE Euronext (NYX) operates the NYSE, Euronext and NYSE Arca exchange markets that provide trade execution of equity securities. Legg Mason initiated the position in late-2007 probably in the low-$80s, and has been on the wrong side of this position ever since as the stock has continued to be weak, dropping below $15 during the 2008/09 crisis and trading currently in the $35 range, so its selling less than half the position from the prior quarter does not carry much informative value.
  • Qualcomm Inc. (QCOM) designs CDMA-based, RF, and power management ICs and system software used in wireless handsets, modem cards and networks. The position was initiated in late-2007, and the stock has been stuck in a $45-60 trading range since then, so its selling about a quarter of the position during the quarter does not have too much conviction.
  • Wal-Mart Stores (WMT) operates 8.970 Wal-Mart and Sam’s Club stores worldwide under discount, super-center and neighborhood market formats. The position was initiated in the summer of 2009, and the company almost selling out of the entire position in less than two years as the stock price has barely budged upwards makes this a conviction sell.
  • eBay Inc. (EBAY) provides online marketplaces and electronic payment services via eBay.com, Paypal.com and other websites. The position was initiated at the end of 2007 probably at prices in the low-$30s similar to current levels. The stock has been extremely volatile since then, trading as low as below $10 in early 2009, so the addition of $48 million or another 15% on top of the prior position does not have much conviction.
  • Microsoft Corp. (MSFT) develops operating systems, business software and other applications for servers, PCs and intelligent devices. The position was initiated in late 2007 probably in the mid-$30s, so the adding of another minor $21 million worth during the quarter does not have any conviction.
  • Wells Fargo & Company (WFC) is a diversified financial services holding company with 9,000 offices throughout the U.S. and worldwide. The position was initiated at the end of 2008 probably in the mid- to high-$20s, and it traded as low as below $8 in the 2008 crisis, so the selling of $59 million worth from the prior $370 million position does not have much conviction.
  • Cisco Systems Inc. (CSCO) manufactures switches, routers and other networking and communications hardware for business and home applications. The position was initiated in late-2007 probably in the mid-$20s, and has been on the wrong side of this position ever since as the stock has continued to be weak, so its selling $19 million worth or its holding of a large $289 million position in the company does not have much informative value.
Table
Company
Ticker
New or Increased or Decreased or Unchanged Position
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
New Picks and Pans
AES Corp.
AES
Decreased
$ 320.72 million
$ 294.61 million
Apple Inc.
AAPL
Added
$ 232.72 million
$ 143.15 million
Celgene Corp.
CELG
New Position
$ 143.04 million
$ 143.04 million
Blackrock Inc.
BLK
Added
$ 200.37 million
$ 132.91 million
Target Corp.
TGT
New Position
$ 129.09 million
$ 129.09 million
NYSE Euronext
NYX
Decreased
$ 144.42 million
$ 118.77 million
Qualcomm Inc.
QCOM
Decreased
$ 288.73 million
$ 103.62 million
Wal-Mart Stores Inc.
WMT
Decreased
$ 8.33 million
$ 102.78 million
Large Holdings
Ebay Inc
EBAY
Added
$ 337.68 million
$ 48.48 million
Microsoft Corp
MSFT
Added
$ 322.92 million
$ 21.2 million
Wells Fargo & Co New
WFC
Decreased
$ 310.48 million
$ 58.9 million
Cisco Sys Inc
CSCO
Decreased
$ 289.15 million
$ 18.91 million
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Top New Conviction Buys and Sells of Legg Mason's Bill Miller