Bill Miller talks about determining intrinsic value, the state of markets and how we look at names like Amazon and Apple.
Bill Miller’s Interview With The Investors Podcast
Stig Brodersen: We feel that one of the best ways to discover value in the market is filtering results based on a ratio of EBIT versus Enterprise Value. What are your thoughts on this and do you perhaps have better means for looking across a broad range of securities and sectors to find value investing gems?
Bill Miller: I think that is very sensible. Every screening technique has pluses and minuses. What Enterprise Value versus EBITDA does is get stocks in the right order from the cheapest to the most expensive, and then you can make adjustments based on the balance sheet, leverage or after tax adjusting, EBIT, for example. I think it’s a good solid way to approach things.
Preston Pysh: Where would you look for risk mitigation after getting a fair price? What would you be looking at to pin down that you’re not entering a value trap at that point?
Miller: We don’t use that as a screening technique, for a variety of reasons. The one that we find most useful for ourselves is free cash flow yield. We find stocks that have a high free cash flow yield relative to the market, which is at about 5.5%-6% right now. We don’t typically get interested in stocks unless they are at about 9- 10%. Then we have to look at free cash flow yield normalization – why is the free cash flow yield so high here and is it because the company needs to ramp up their capital spending program, or because return on capital is dropping and the business is getting worse. There are all kinds of different reasons and this gives us a filter to compare. We look at sustainability because our view is that everything is priced off of the risk free rate. There is the risk free rate, equity risk premium, median free cash flow yield of the whole market and outliers in play. And then the question is, are they justified? Is it likely to revert to the mean over time or go below that.
Read the full transcript here.