Buying Growth At The Right Price

MFS Capital Opportunities is the kind of mutual fund most stock pros would love to run. Although primarily a large-cap fund, mid-cap and foreign stocks are fair game. So are unglamorous but steady engines of the Old Economy, and dynamic New Economy upstarts. Indeed, manager Maura Shaughnessy says, "I'll go anywhere the ideas are."

To find the best ideas, Shaughnessy blends the aim-for-the-stars growth investing style with its bottom-feeding value counterpart. She looks for companies that can improve earnings at a fast clip. But she buys only when the price is right. By that she means stocks that are cheap relative to their "history, peer group, and prospects." That approach has paid off. In the three years ending Dec. 8, MFS Capital Opportunities earned an average of 20.3% a year, placing it in the top 2% of its large-cap peers.

Where does Shaughnessy find opportunities now? Beaten-up telecom stocks. "Many of the telecom stocks have been so badly beaten that if you have a one-year time frame, I feel confident you potentially are going to make a lot of money." Take Global Crossing Ltd. (GBLX), a worldwide telecom player. Its stock, down from 62 in February to 15.69, sells at a lower cash-flow multiple than some of the Baby Bells with three times the growth potential, she says.

Another pick, telecom company XO Communications Inc. (XOXO), has been punished. But Shaughnessy's cash-flow models show it's worth 50 a share. Hit by falling chip prices, Micron Technology Inc.'s (MU) fundamentals are unlikely to worsen, "and over time should get a lot better," she adds.

Shaughnessy is also betting on Israeli cellphone company, Partner Communications (PTNR), and Extreme Networks Inc. (EXTR), a broadband provider.

Although oil stocks have run up this year, Shaughnessy believes that Sante Fe International Corp. (SDC) and Grant Prideco Inc. (GRP) have a ways to go. Indeed, both are trading closer to their lows than to their highs for the year. The last of Shaughnessy's picks are independent power company Calpine Corp. (CPN) and investment bank Lehman Brothers Inc. (LEH) Shaughnessy believes both are undervalued, but Lehman could also be a takeover target. At 61.81, the stock trades at a little over twice book value, while acquirers have paid 3 to 3.5 times for its competitors.

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