Guess the Mystery Stock
Bill Miller describes a stock but won't reveal the company's name. I've been trying to figure it out, but I'm stumped.
Some mutual fund managers I never tire of learning from. A big favorite of mine is Bill Miller, the Legg Mason fund manager who defines value investing in ways that almost nobody else does. This issue contains our third Insider Interview with Miller (see A Legend Sizes Up the Market), and I commend to you his explanation of why Google is an undervalued stock. During the course of our conversation, The Great One throws out a tantalizing little nugget.
We are talking about Legg Mason Opportunity, the smaller of the two funds he manages, and the fact that it tends to invest in smaller companies. Miller makes the following remark, which amounts to a riddle:
"The last company we added to Opportunity, which we can't yet disclose, has a $2-billion market cap. It's got no debt. It's buying back 10% of its stock. The stock is down 30% to 40% from its peak, and 45% of the stock is sold short. We talked to one of the shorts today. He's like hanging-off-the-ceiling panicked. He's saying that if they beat the earnings number, this thing could be up 50% in an hour. We think they're going to do pretty well. It could also go private at a price 40% or 50% higher. The CEO had a great line when he was asked why he didn't go private. If you're public, of course, you have the problem of short-termism and analysts asking stupid questions and people telling you what to do. His comment was something to the effect: Yes, it's true that every quarter I have to do a conference call and listen to people ask dumb questions or tell me what I ought to do, but I just ignore them and go back to doing what I want to do. He said, 'If I take it private with private-equity money, then I've got some 35-year-old partner -- and he will tell me what to do because they'll control the company. And I don't want that.' "
That's all Bill will say. Later, I ask the magazine's staff which stock fits the description. Writer David Landis comes up with a name: IndyMac Bancorp, a thrift whose shares have fallen from $50 to $30 in the past year, partly because of subprime loans it has made. And sure enough, approximately half of its shares are sold short -- that is, people are selling borrowed shares in hopes of buying them back later at a lower price.
This looks like an interesting stock, all right. When and if it turns its business around, the stampede caused by short sellers covering their positions will give the stock price a mighty boost. So, on a lark, I send word back to Miller that we've uncovered the name of his mystery stock. To his credit, Bill doesn't mislead us. Back comes this: "No, it is not IndyMac."
Senior editor Jeff Kosnett says he suspects the stock is Corporate Executive Board, whose shares fell from $111 to $73 -- and then to $60 in late April, when first-quarter profits failed to live up to analysts' expectations. The company has no debt. But there's a problem: Only 7% of the shares are sold short. Good try, Jeff, but Corporate Executive Board is not the mystery stock, either.
You tell me
I give up. Now it's your turn. We'll know the name of the mystery stock when Opportunity issues its June 30 shareholder report in July. The first ten of you to e-mail the correct name of this company to email@example.com before the report is released will get wonderful gifts of apparel: Kiplinger's Personal Finance T-shirts that you can wear with pride.