"Financials have the biggest potential to outperform" over the next two years. So says Bill Miller, who put together a remarkable 15-year winning streak over the S&P 500 at the helm of the Legg Mason Value Trust. Miller practices value investing, not sector rotation -- he analyzes each stock on its merits -- and he named five financials that he believes are best positioned to reward investors.

The S&P 500 up more than 20%, with financials to outperform!
Miller expects the S&P 500 to end the year at around 1,100 to 1,200, so an "outperform" call on a sector or a stock implies anticipated returns that are significantly positive. These are his favorite financial stocks:

Stress Test Subjects

  • Wells Fargo (NYSE:WFC)
  • Capital One Financial (NYSE:COF)
  • American Express (NYSE:AXP)

Other Financials

  • Aflac (NYSE:AFL)
  • Prudential Financial (NYSE:PRU)

Admittedly, the bear market has exacted a heavy toll on Miller's reputation. Last year's abysmal performance by the Value Trust (a 55% loss, against a 37% loss for the S&P 500) marked the fund's third consecutive year of underperformance. Its exposure to financials contributed heavily to losses in 2008.

Bill isn't alone
Nevertheless, Miller is probably right when he says that his underperformance will pass -- you've got mean reversion with you, Bill! (Year to date, the Value Trust fund is up 8.7% vs. a 2.8% gain for the S&P 500). And although I think he's a bit overly optimistic about the economy (he says GDP growth could reach 3% in the fourth quarter), I do think that the expected returns on high-quality financial stocks over the next three to five years are attractive.

After all, another, more successful value investor -- Warren Buffett -- voiced similar thoughts concerning the prospects for well-run financials at Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) annual meeting last weekend.

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Alex Dumortier, CFA has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. AFLAC and Berkshire Hathaway are Motley Fool Stock Advisor picks. American Express and Berkshire Hathaway are Motley Fool Inside Value recommendations. The Fool owns shares of American Express and Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.