A Lonely Voice Is Vindicated as Google Falters

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By Jerry Knight
Monday, February 6, 2006

When Google stock plummeted Wednesday, investors in Maryland's most-vaunted mutual fund, the Legg Mason Value Trust, lost $130 million in value in a single day.

But Google could do no damage to investors who had heeded the advice of the analyst who used to study Google for Legg Mason Equity Research.

Scott W. Devitt, who now works for Stifel, Nicolaus & Co. in Manassas, issued a "sell" recommendation on Google two weeks earlier -- soon after the stock peaked at $471.63 a share. Clients who took his advice dodged the bullet that blasted a hole in Google stock when the Internet search company failed to deliver the outsize profit investors had expected.

Devitt and the entire Legg Mason retail research department were traded away by Legg Mason last year when the Baltimore company got out of the retail brokerage business, selling its branches to Citicorp and its research division to St. Louis-based Stifel.

Devitt expressed skepticism in his reports about Google's stock even before he left Legg Mason. Since then he has repeatedly escalated his warnings, citing both the astronomical price of Google shares and potential flaws in the company's business model.

Devitt's doubts about Google put him at odds with the man he calls his "idol" at Legg Mason -- the legendary William H. Miller III, manager of the Legg Mason Value Trust, the only mutual fund that has outperformed the Standard & Poor's 500-stock index for 15 years running.

Miller was one of the first to get on the Google bandwagon, grabbing the stock when Google went public in August 2004 at $85 a share. Many investors thought Google was overpriced at $85, but Miller considered it undervalued and loaded up with 4.2 million shares.

That bold bet made more then $1.2 billion for Legg Mason Value Trust investors -- and that's after the recent retreat that knocked $90 a share off Google's stock, which closed Friday at $381.56.

It would be great to sit Devitt and Miller down to debate the value of Google shares. But Miller is letting his track record do the talking, and you get the impression from Devitt that he's hesitant to argue with such a highly regarded former colleague.

"I have few idols in this business and Bill Miller is one of them," Devitt said in a telephone interview last week. He added that picking a stock that will quadruple in 18 months, as Google did, is a lot tougher than telling investors when it's time to get out.

But give the guy credit. Devitt told people to sell Google when almost everyone on Wall Street was telling people to buy it. In fact, almost everyone on Wall Street is still telling people to buy Google. As of Friday, the stock was rated "buy" by 30 analysts and "sell" by just two, Devitt and Scott Kessler of Standard & Poor's Equity Research Services.

After Google shares plunged, the same analysts who had touted it before touted it again, insisting that the decline was not a reality check but really good news: The stock we told you to buy at $450 a share is an even better buy at less than $400, they said.


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