legg mason report, page-4

Hi Jake

this is from the legg mason website:

" A detailed valuation model is built for each security, which is underpinned by a focus on return on capital. An understanding of the key drivers, uncertainties and risks is developed and constantly reviewed for each security. The explicit forecasts of future profitability generated by our research are input to our in-house Dividend Discount Model. The Model then generates a valuation signal that is compared to the current market price of each security. This comparison produces a "return to fair value" which is used to rank all securities. The portfolio makes overweight allocations to the attractive securities and underweight positions are established in the expensive names.The portfolio is actively monitored, with the valuation signal driving each trade decision."

My guess is that they are saying that they see the sector and stocks as very cheap relative to historical experience at valuing securities, but to your specific question. They might typically expect stocks they value to be within a range of + or - 15% of market price. That is, the stocks they buy are trading at a price 15% below their valuation. However, the stocks they are currently buying are trading at 60% below their valuation.

I don't know their specific investment process, but I think this is the general gist of what they are saying.

Cheers, PViews