Bill Miller wants Yahoo buyback

Monday’s selloff in Yahoo (YHOO) is creating more pain for value manager Bill Miller. Miller is chief investment officer at Legg Mason Capital Management, which at Dec. 31 was Yahoo’s second-biggest shareholder, with a 6.9% stake, according to Lionshares.com. Yahoo had been one of the standout performers in Miller’s Legg Mason Value Trust, which lost 20% of its value in the first quarter as big bets on beaten-down financial stocks such as Bear Stearns (BSC) went sour. But Monday’s 14% decline in Yahoo takes the stock about half the way back to where it was trading before Microsoft (MSFT) unveiled its $31-a-share bid on Feb. 1. Should they stick, Monday’s declines will reduce the fund’s gains in Yahoo accordingly.

Miller indicates in an interview with The New York Times that he’s surprised by Microsoft’s decision to walk away from Yahoo, and eager to see Yahoo do something to justify shareholders’ patience. He wants to see CEO Jerry Yang turn some of Yahoo’s cash holdings toward a share buyback, he says in the interview. “It would be almost incoherent not to do so,” Miller said. “You can’t maintain that $33 undervalues your company, have your stock trade below that, and not buy back stock.”

Despite the Yahoo selloff and Monday’s decline in another big Legg Mason holding, Countrywide (CFC), Miller’s doing better in the second quarter. He noted two weeks ago in his first-quarter letter to Value Trust shareholders that the fund was ahead of the S&P, and a look at Legg Mason’s biggest holdings as of March 31 shows that only two of his top 10 stocks - UnitedHealth (UNH) and General Electric (GE) - are down this quarter. “I think we will do better from here on,” Miller wrote on April 23, “and that by far the worst is behind us.” So far, so good.