Will These Acorns Turn Into Oaks?

A 13-year-old boy named Rob Mohn spotted a book, The Bulls and the Bears, in his suburban Chicago school library. His first thoughts: basketball! football! Then he looked closer. The next thing he knew, he got his dad to help him buy Ethyl Corp. convertible preferreds. Right away, they plunged--this was amid the rout of 1974--but he held on for a profit. "I became a total stock geek," he says. Other kids "just looked at me as a freak."

As Mohn recalled all this recently in his 30th-floor Chicago office, I couldn't help thinking that at age 38, he's still boyish, and he's still a stock geek. Then I wondered: What's he buying now?

His $310 million Acorn USA Fund has just turned three years old with freaky--I mean, uncommon--results (table). It's up 69%, more than twice the return of its small-cap benchmark, the Russell 2000. Better yet, Standard & Poor's figures that the fund soared even after adjusting for risk. How? Just the way Mohn's mentor, Ralph Wanger, manager of the venerable Acorn Fund, taught him: By patiently picking and holding stocks in strong little companies that figure to grow into big companies.

Acorn Fund, which unlike Mohn's includes foreign stocks, is famous for four-digit gains in the likes of Harley-Davidson and Carnival. Less famously, Mohn's fund has been scoring with such stocks as fiber-optic networker RCN, in which Microsoft co-founder Paul Allen also holds a big stake. Wanger, Mohn, and the managers of Acorn's three other funds swap stock ideas freely. Where do they see future gains? Here are four stocks they've been buying lately, and why:

-- PROJECT SOFTWARE & DEVELOPMENT. Like the rest of us, Mohn is agog at the market values Internet companies are getting. He wants some of that, too, but he wants it the Acorn way--at better odds. That's why he has been buying this maker of custom software systems. He calls it "my chicken-hearted Internet play." Factories use the company's new business-to-business Web site, MRO.com, to order replacement parts and supplies. Mohn bought the stock around 40, figuring he got the established software business at a fair price, plus a cheap call on MRO.com. What's MRO.com worth? Hard to say, but rival Ariba went public in June with a $1 billion-plus market cap, nearly twice the value investors now put on all of Project Software.

-- AMERICREDIT. This company is a leader in financing sales of used cars to people with bad credit. Sounds like a rotten business. Fact is, it's the same line that sent highflier Mercury Finance into bankruptcy last year. The difference, says Mohn, is the software tools that AmeriCredit developed to figure out which borrowers are better risks, a job traditional lenders like Mercury left largely to a loan officer's intuition. He sees profits growing at 30%, yet at 14, the stock goes for 10 times next year's estimated earnings. He thinks it's worth about 25.

-- FIRST HEALTH GROUP. Outsourcing is a theme running through stocks in the Acorn funds, and First Health is a prime example. It has built a nationwide network of preferred provider organizations and collects a fee for matching them with such big companies as McDonald's. "They do the dirty back-office work," Mohn says, but bear none of the underwriting risk shouldered by health insurers. Now at 22, the stock in Acorn's view is worth 30.

-- NATIONAL DATA. Mohn's big position in this processor of credit-and debit-card charges and prescription claims got whacked recently when quarterly earnings missed the Street's estimate by a penny. At 25, the stock boasts a ratio of price to future earnings of about 10--to Mohn, a "dumb" number. The market is confused, he thinks, because National Data operates in two distinct markets--financial services and health care. "The stock falls in the Wall Street cracks, where we pick it up," he says. Its goal, to automate physician claims much as it does those for prescriptions, lends it growth potential the market is ignoring. He values it around 60.

Will all four of these stocks prove instant winners? Unlikely. But as even less precocious stock geeks I know have learned, winning is all about picking carefully and staying patient.

Questions? Comments? E-mail barkerportfolio@businessweek.com or fax (407) 728-1711