Bill Miller: A Legend Sizes Up the Market

You'll consider stocks that most value investors won't touch. How do you justify owning a Google? This is what I call the value conundrum. Look at what have been the biggest wealth-creating companies: Microsoft, Wal-Mart, GE, Johnson & Johnson. You could have bought Microsoft in 1991 at 35 times earnings and made 40 times your money over the next ten years. If you had bought Wal-Mart when it went public, you would have paid 20 times earnings and you would have made 10,000%. If a stock goes up 30 or 40 times in ten years, it has to have been grossly underpriced to begin with. So Microsoft was not expensive at 35 times earnings. It was one of the best bargains out there.

But you think its growth potential and its future cash flow make it cheap today? Yes. It trades at 24 times next year's earnings estimates. We can't find any other company in the market with a faster revenue growth rate and higher profit margins, and that dominates its business like Google but has a lower P/E multiple. MasterCard now has a higher 2008 P/E than Google!

It's that unique? Google trades at a lower multiple than Starbucks. Now, Starbucks is a great company, but Starbucks is growing at half Google's rate. On next year's estimated earnings, Google's P/E is six points higher than Coca-Cola's, but Coke long term is only an 8% grower.

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