Best Time to Buy Stocks Since 1980s: Legg Mason's Miller

Published: Wednesday, 20 Oct 2010  11:12 AM ET

Stocks are cheap right now and it may be the best time to buy them since the early 1980s, Legg Mason Capital Management Chairman and CIO Bill Miller told CNBC Wednesday.

"The last ten years have conditioned people to think short term as opposed to long term," Miller said. "Now, stocks are cheap and people should buy good, quality companies at reasonable prices, put them away and ignore the day-to-day fluctuations of the markets. It's the best time since the early 1980's to buy."

Miller also said he thought the market would be on the upswing over the next year. "I wouldn't be surprised if the market isn't up 20 percent in the next 12 months," Miller went on to say.

Miller said he preferred stocks to bonds right now, based in part by what the Federal Reserve might do with buying more bonds and increasing the money supply—known as quantitative easing.

"The Fed is going to put more liquidity into the economy, the monetary basis is going to grow as a result of that, but stocks are just incredibly cheap as opposed to bonds and inflation is effectively zero to one percent." Miller said. "And so you have free-cash-flow yields of the overall stock market right now around 7 percent and about a third of the stock market has a free-flow yield of about 10 percent, and with people trying to buy Treasurys at 2.5 that is just incredibly attractive."

Miller added that some companies need to increase their payout ratio—or earning dividends to shareholders—and stop hoarding so much cash. He cited Hewlett Packard as one company that needs to raise its payout.

"Right now, you have companies, like HP holding cash or are over capitalized. But if payout ratios were higher than they are today, then people would have more money in the stock market," Miller said. "HP hasn't raised it's dividend in five, six years. If they and other companies paid out 70 percent the stock could be up 50 percent easily."

As for sectors he likes, Miller cited financials, health care and tech.