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Value Stocks: How to Buy Steak for the Price of Hamburger

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Managers of the Becker Value Equity Fund tell us where they see opportunity.

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Becker Value Equity (BVEFX) is a pint-sized fund you might not have heard of, but Morningstar fund analysts say you should consider it as a worthy option if you're hunting for money-making mutual fund managers.

The Portland, Oregon-based team running the fund employs bottom-up, fundamental analysis to spot large cap stocks trading at attractive valuations. Their talent for stock picking has resulted in a strong long-term record that beats the competition.

Through December 10, the fund has generated a five-year annualized return of 3.27%, outpacing the Russell 1000 Value Index and besting its Morningstar peers by 3.20 percentage points, or 96% of its rivals. Morningstar awards the fund five stars, its highest rating.

The no-load fund, with $86 million in assets, has an expense ratio of 0.99% and requires a minimum investment of $2,500.

Recently, we spoke to portfolio managers Marian Kessler and Robert Schaeffer about the fund's investment philosophy and process and some of their top picks right now, including Aetna (AET), Symantec (SYMC), and JPMorgan (JPM).

Minyanville: Is it harder now to find opportunities after this run up?

Marian Kessler: We found a lot of opportunities last fall. Our job is to find stocks, not to get caught up in the emotions of the moment. We found a lot of incredibly attractive stocks that weren't selling on fundamentals. They were selling on investor panic and technical issues. If a hedge fund gets redemptions then they must sell everything. That gave us enormous opportunities. But our monitor list was much more robust and lengthy a year ago than it is today.

Minyanville: How have your sector exposures changed since last year in this time?

Kessler: In the fourth quarter of last year, we really had the chance to upgrade the quality of the individual securities owned within our portfolios. If we could buy a great company selling at a valuation consistent with or lower than a stock owned in the portfolio of lesser quality then we were happy to trade up for that. We bought companies like Emerson Electric (EMR), Schlumberger (SLB), Harris (HRS), and Weatherford (WFT).

Minyanville: Which names did you trim?

Kessler: Companies like Cadbury (CBY) and General Mills (GIS), which was sold out in its entirety. These were stocks where valuations had increased substantially. They were looking rich. So we took the opportunity to sell names in the consumer staple area. There were other stocks warranting our attention.

Robert Schaeffer: In the emotion of the sell-off last winter, we had a lot of conversations with concerned clients. Investors were throwing the baby out with the bath water. We saw a real compression of valuations. The best companies were selling at comparable valuations of lesser companies. You could buy steak for the price of a hamburger.

Minyanville: Do you consider yourselves contrarian investors?

Schaeffer: No, we aren't contrarian managers. The contrarian is exclusively looking for unpopular companies. We are looking for companies that are unpopular, but also have good fundamentals and forward momentum. Pure deep value people are typically looking for more distressed merchandise than we are.

Kessler: The PE of our model portfolio is 14.1 times [2009 earnings] while the PE of the Russell 1000 Value is 19.5 times. Looking over the last 10 years, we bought companies that delivered a 15% earnings growth rate versus 13% for the Russell 1000 Value. So we want to buy growth, but we are just careful about what we pay for it.
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No positions in stocks mentioned.
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