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"Stop Worrying, and Start Buying"

By Amey Stone Robert Olstein, manager of the Olstein Financial Alert Fund (OFALX), is the kind of money manager the pros watch closely. That's partly because of his ability to perform detailed financial analysis, which allows him to avoid the Enrons, Tycos, and Sunbeams of the world. Pouring over financial statements and shunning both Wall Street research and meetings with company management, he sticks to companies with strong balance sheets.

"In this irrational world of accounting, following and being invested with someone like him is a good protection against some of the irrational theories that are out there," says Barry Hyman, chief investment strategist with Ehrenkrantz King Nussbaum.

Here's another reason Olstein is worth keeping an eye: So many of his against-the-grain stock moves have been right. A strict value manager, he bought carpetmaker Shaw Industries for around $12 a share in 2000 -- not long before Warren Buffett bought the company for $20 a share. Last year, Olstein bought J.C. Penney (JCP) at an average price of around $12. It's now up to $23. This year, he took a small, short position in General Electric (GE), which he considered overvalued. Now that it has fallen about 25%, Olstein says he'll soon cover that position.

LEADING REBOUNDER. Returns for Olstein Financial Alert, which now has $1.6 billion in assets, have averaged 20% for the past five years, vs. 6% for the Standard & Poor's 500-stock index. The fund has been remarkably consistent in both bull and bear markets, posting double-digit returns every year since its 1996 debut. "Even during the tech-stock heyday, he still did as well as growth managers," notes Hyman. This year, the fund is up 1%, while the S&P is down 10%.

Lately, Olstein is loading up on semiconductor companies as a way to play a tech-spending rebound in 2003. TriQuint (TQNT), LSI Logic (LSI), and International Rectifier (IRF) are a few of his picks. "We were buying Old Economy stocks back in 2000. Now, we're buying tech," says Olstein. "We buy stocks that have some kind of cloud around them."

Clearly, Olstein doesn't mind being early to the game. His core strategy is to buy the strongest players in industries that are weak, and then hold the stocks until the sectors turn around. "We have patience, and that is required if you are truly a value investor," he says.

MARKET OVERREACTION? Another troubled sector he's investing in is finance. He has been adding battered brokerage firms like Merrill Lynch (MER), Goldman Sachs (GS), and Morgan Stanley (MWD) to his portfolio, and he believes investors are overreacting to current market conditions. "These companies are much more solid than people realize," he says, pointing out that they get an increasing chunk of income from recurring sources, such as money-management fees or interest income.

He also thinks property-casualty insurers are in a strong position, since they're raising rates. Favorites there include Chubb (CB) and W.R. Berkley (BER). He owns some big banks, too, like Citigroup (C) and Bank of America (BAC).

In addition, his diversified portfolio contains some drug companies, including Merck (MRK) and Pfizer (PFE), which have gotten knocked down on industry weakness. He has positions in some retailers, like OfficeMax (OMX) and J.C. Penney. Once the economy turns around, he thinks there may be a gas shortage, so he's also buying drillers. Rowan (RDC) and ENSCO International (ENS) were large holdings listed in his Feb. 28 annual report.

TIMELY WORRIES. Olstein credits his excellent long-term returns to his tendency not to take unnecessary risks. By sticking with companies that have enough cash flow to pay off debt in five to six years, he has avoided major blowups. "I worry about losing money before I worry about making money," he says.

"He's a smart manager who has the courage of his convictions," says Bill Rocco, a senior analyst at fund-rating firm Morningstar. He notes that Financial Alert's expense ratio, at 2.2%, is higher than average, and Olstein trades quite a bit (turnover has come down from 100% last year to about 50% lately). Rocco recommends that investors hold the fund in a tax-deferred retirement account.

Olstein will occasionally take small short positions (betting the stock will fall). Washington Mutual (WM) is one such stock he currently considers overvalued. In general, though, he thinks investors should be looking for stocks to buy, not sell. Olstein usually maintains a cash position of 15% in the fund, but right now he's down to 10% and is still buying.

The time to worry about overvalued stocks was two years ago, he says. "Now, it's time to stop worrying and start buying." For investors ready to make that switch, going with Olstein could be a smart way to venture back into the market. Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column

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