How do you follow a legend?
That's been one of the challenges for Sam Peters, who has been
lead manager of $2.7 billion ClearBridge Value since taking the
baton from Bill Miller about two years ago.
Miller -- who still runs $2.1 billion Legg Mason Opportunity
-- ran Value from its April 16, 1982 inception until April 30,
2012. He famously beat the broad
as measured by the S&P 500 for 15 years in a row -- from 1991
Miller's winning streak came to an end. Peters joined as
co-manager in late 2010 and took the lead in April 2012.
Peters has made progress in returning Value to the apex among
top mutual funds
. The fund beat 24% of its large-cap blend peers in 2011, 46% in
2013 and is ahead of 83% this year through July 31, says
The fund changed its brand name from Legg Mason on March
Peters, 45, discussed his
from his office overlooking Baltimore Inner Harbor.
Is the crux of your strategy the pursuit of mispriced stocks?
We look at traditional growth stocks and traditional value
stocks. We go up and down the quality spectrum. We try to come up
with a reasonable range of business values (for a stock) under
future scenarios. I'm a valuation manager. But the real expertise
is looking at stocks and free cash flow analysis, then over time
figuring out what powers a stock's return and finding those with
a price-to-value gap.
Many people say no one can do that consistently for long
Any time you're an active manager, you have to take a humble
approach. The market's tough to beat. Once an analyst comes to me
with a stock whose valuation is 60 or 70 or 80 cents to the
dollar, I ask what is the market getting wrong? I look for things
that strengthen or weaken the investment case. I look for reasons
why the market's expectations are wrong. Most of the time, it is
not wrong. We look at hundreds of stocks to find a few where the
market is wrong.
How come you don't end up with a lot of broken stocks?
I don't want Frankenstein. I want the most diversification I can
get in a concentrated portfolio -- I own only 40 to 50 names --
but I don't want to pay for it. We've got to be disciplined. It
takes time for (mispriced stocks') price and value to converge.
That's why our average holding period is three-plus years.
How does your approach differ from Bill Miller's?
I became co-manager in November 2010. He was a good coach. I
started changing some things. He encouraged me. I like to cast my
net wider, for example. We were very underweight in health care
when I came on board. And I have a health care stocks background.
So we went from 4% underweight (vs. the S&P 500) to about 6%
overweight. I cut some financials and housing stock to do that. I
also sold some tech names.
We're overweight energy. We weren't when I came on board.
We're very overweight financials now and we're overweight tech.
Health care peaked at 6% overweight earlier this year.
For people who may not know, what is your health care
I managed the global health care team at Fidelity and managed
Fidelity Select Health Care and Select Medical Equipment funds
from January 2004 to April 2005.
How else does your approach differ from Miller's?
Take breadth. Let's say there are 10 great price gap stocks. If
two are home runs you can hit out of the park, Bill will
concentrate on those. I'll take more names, even if there's less
upside. I'll add four or five nice valuation bets and diversify
the fund more.
Is the purpose of added diversification to cut volatility?
It's not necessarily to make the fund less volatile. But the
result is that it is less volatile over time.
What's your biggest bet?
I'll answer that this way. My biggest overweight is a bet on
higher interest rates. That's moved against me year-to-date, but
I'm still ahead of the market.
Do you still pick Miller's brain?
He's been my biggest mentor. Always will be. We are very close
friends. I have the utmost respect for him.
He was relieved when I charted my own course. That contrarian
streak in buying negative price momentum and being
differentiated, that got reinforced by and I learned a lot from
Bill. I learned about being intellectually diverse, reading
widely, talking with people, not being dogmatic, all from Bill.
Yet it allowed me to be different from Bill.
We talk investing, but we rarely talk individual names.
Bill is a huge contrarian (too). We share that common DNA, and
he pushed me to really think for myself and look at the facts,
which is essential if you are going to have a contrarian
approach. Be contrary to opinions and not facts.
How much skin do you have in the game?
I'm one of the larger shareholders in the fund, which is how it
should be. It's the largest chunk of my net worth. My SEC
disclosure has me over the $1 million mark. When I get bonuses, I
add to the fund. I am the largest individual shareholder in the
fund, though some institutional shareholders have more.
Your June disclosure shows your stake inApple (
) jumped to 1.3 million shares from 205,000 as of April 30. Apple
had a 7-for-1 split, so did you also trim?
Yes, Apple had a split, and I've actually been trimming.
I typically buy when a negative narrative goes too far. I get
excited if the hurdle goes from 4 feet high to an inch high. That
was the case with Apple at 400. At 650 it's a tougher case.
(Post-split Apple is trading around 95.)
People are excited about a 6-inch screen (on the iPhone) and a
watch that are supposedly coming.
But Apple is discounting flattish margins. It is discounting
some growth. And it's a higher hurdle to jump over. It's not
massively overvalued. But it's less interesting than it was.
) is another recent split, right?
It is. This is a classic for us. We got involved before the big
biotech run, when it was a value stock. When I joined the fund,
health care was in the dumps.
I love positive price momentum. I just don't want to pay for
it. We trimmed before biotech got hit in March. Then when Celgene
got sold (by the market) in Q2 we added back when expectations
got reset. I think Celgene will be a long-term winner. And we
think Celgene will prevail on its Revlimid patents (in its court
fight against Natco, which is developing a generic rival for
Is fracking the bedrock of yourHalliburton (
They put straws a mile down into the ground, go out 5,000 feet
horizontally, then blow up rock underground to drive more oil up.
The more complex those wells are, the better the economics for
What we noticed about the shale revolution is that rig
productivity is doubling every three years, which is amazing.
Halliburton is capturing a lot of those efficiencies.
Why did you trimBroadcom (
) between April and June?
This was classic for us. Broadcom was doing some bad things,
throwing huge amounts of money into chasingQualcomm's (
) monopoly in baseband chips. They made no headway. They diluted
their own fundamentals on an uneconomical bet.
They ended up with the lowest valuation of all large-cap
semiconductor stocks. We bought when everyone told us we
shouldn't. It was in the high 20s. (Now it's trading in the high
30s.) It was so bad, it was good. We thought they would get
pressure from employees, shareholders, their own board to fix
things. We felt if they made changes for the better, the stock
would go up a lot.
And last quarter, lo and behold they said 'Uncle.' They
stopped chasing Qualcomm's monopoly in baseband. They said they'd
give back more to shareholders. Profit margins would go up. So
you'll see positive earnings revisions.
We still think the business value is higher, somewhere in the
40s. Now it has positive momentum. We have a big position. So
you'll see us trim a little.
Calpine (CPN) earnings-per-share growth has accelerated for three
quarters. What's your thesis?
We began buying early this year around 19. Late first quarter,
early second quarter. They're taking a 12% free cash flow yield,
which is extremely high, and buying back a lot of stock. So we
got in effect a high tax-efficient yield. In a 2.5% 10-year
Treasury world, that's a good way to win.
We (the U.S.) reward underbuilding utility power supply in the
U.S. Especially in Pennsylvania, New Jersey and Maryland. We're
having lots of coal utility retirements. We're not building new
nukes (power plants). So power supply is getting tighter. We
think this will set up a lot of power pricing volatility. Which
is great for Calpine.
UnitedHealth Group (UNH) is uptrending despite modest EPS
results. What's your view?
They got hit with negative earnings revisions due to ObamaCare.
But the stock was cheap enough to withstand it. Now estimates
have stabilized. They have growth in services, growth in their
core managed care side. Mixed with low valuation and better
earnings as we look into 2015, it will result in a nice stock. A
low valuation lets you be timing agnostic.
When didExpedia (EXPE) look like a value play to you?
We bought it last fall when it stumbled on earnings last summer.
It became very cheap.
I met management in the fall and became comfortable that they
had gotten their technology platform in good enough shape to
manage pressure fromPriceline (PCLN). I felt we should see
positive earnings surprises against a lower bar.
And we think the online travel space is a good cash
What do you like about truck and parts makerPaccar (PCAR)?
Trucking capacity is getting tight. You can't get drivers. And
the (national) fleet is getting old, so it's set for a
replacement cycle in a big way. That's building a big fundamental
tailwind for Paccar. And they're good about capital
Dr Pepper Snapple (DPS) is uptrending, so why do you still like
They've done a good job turning no top-line growth into
bottom-line growth by smart capital allocations. And they're
buying back a lot of stock well below its business value.
They've driven profit margins higher and rationalized their
business. Also -- and this bothers me a little -- people have
been looking for domestic plays. Dr Pepper is a North American
beverage play unlikeCoke (KO) andPepsi (PEP). Its valuation is
getting less attractive. But we're still holding it.
What bothers you about investors liking U.S. stocks?
We try and find uncrowded games, and the U.S. is seen as the safe
zone right now. That may be true, but high investor expectations
and crowding make it a risk.
Wells Fargo (WFC) has met or topped consensus expectations in
recent quarters. What else do you like?
They're incredibly well managed. After their last stress test
regulators said basically that they can return about 100% of
their earnings to shareholders if they want to, which is
unprecedented, withCitigroup (C) hanging out at zero. And they're
dominant in the mortgage market. Return on equity is well into
the double digits. They're selling below business value. And if
we get higher interest rates, that's going to be good for large
banks and life insurers.