Bill Miller on Amazon, eBay, Expedia and Yahoo

by: Bill Miller

Bill MillerHere's the excerpt from Bill Miller's Q2 letter to shareholders of his Legg Mason Value Trust in which he discusses his position in Internet stocks:

There are four main reasons why the [Legg Mason Value Trust] portfolio is currently trailing the S&P 500. The first has to do with our allocation to the internet names which include Amazon, eBay, Yahoo, Expedia, Interactive and Google. These names started the year at roughly 20% of the portfolio and collectively are responsible for close to 400 basis points of underperformance over the past 6 months. Over the last several years, these companies have exhibited a seasonal pattern of weakness in the first half of the year followed by a period of better second half performance. All of these businesses are doing well and trade at substantial discounts to our assessment of fair value. All have traded off on some degree of angst about company-specific near-term issues.

Yahoo sold off 20% last week because it is delaying implementation of its revised search strategy for a couple of quarters in order to ensure a smooth and successful launch. Amazon traded off 20% this week because of margin compression this and next quarter as it continues to spend heavily on technology and content. EBay is down 40% this year because of concerns about slowing US growth due to their having captured so much of the addressable market so fast (in other words, they are so good, they are bad), because the market is not sure about how the Skype deal will play out, because Google’s new check-out product is seen as a competitive threat to PayPal, and so on. Even when one of these companies reports remarkable numbers, as Google did, the prevailing sentiment leads to the stock’s selling off on concerns things can’t get better.

In our view, these companies represent superior economic franchises with the ability to earn above the cost of capital as far as the eye can see, and the market’s myopic, obsessive focus on what is going on for the next three or six months doesn’t alter the business value. Price and value are two different things. We estimate the intrinsic business value of Yahoo, Amazon, and eBay at up to more than double the current price, depending on the company, and that is current value, not what the value is likely to be in several years.

The Legg Mason Value Trust portfolio holdings as of June 30th, 2006 are here. Full letter here [PDF]. Legg Mason funds home page here.