Size Doesn't Matter. The P-E Ratio Does

Many investment pros box themselves into buying just large-cap, mid-cap, or small-cap stocks. Ronald Muhlenkamp, who runs the Muhlenkamp Fund out of Wexford, Pa., doesn't believe in such strictures. His picks for 2002 run from financial giant Citigroup (C ), with a market value of $240 billion, to $155 million Stanley Furniture Co. (STLY )

What Muhlenkamp's 10 choices have in common is their relatively low valuations. He seeks companies that have returns on equity above 14%, with price-earnings ratios below their ROE. "In layman's terms, we look to buy Buicks at Chevy prices," he says. That strategy has earned him high marks--and a 17% annualized 10-year return through Dec. 14.

Underlying his stock picks is the conviction that the economy will recover in 2002. Consumer cyclicals have historically performed well in the early stages of a recovery. And Muhlenkamp's list includes four housing-related companies. He favors homebuilders Beazer Homes USA Inc. (BZH ) and NVR Inc. (NVR ) because they are grabbing market share from the independents. Fidelity National Financial Inc. (FNF ), a title-insurance company, stands to profit whether people buy homes in a strong economy or--as they have recently--refinance in a weak one. Stanley Furniture's sales would get its biggest boost from a recovery. But even in a struggling economy, sales for its youth furniture will hold up well, he says.

Two of his picks would benefit from a resurgence in the global economy. Muhlenkamp sees Citigroup's growth potential in providing banking services to developing nations. And shares of Mexican cement maker Cemex (CX ) would firm in a building spurt.

The others are a hodgepodge. Superior Industries International Inc. (SUP ), an auto-parts maker, will benefit as carmakers switch to its aluminum wheels. Muhlenkamp thinks Arkansas Best Corp. (ABFS ), a trucking firm that specializes in smaller loads, will likely prosper, too--particularly since potential competitors have high barriers to entry. Cendant Corp. (CD ) would gain if increased travel creates a greater need for its booking business.

Like all value investors, Muhlenkamp is drawn to stocks the rest of the market shuns. To that end, he calls power producer Calpine Corp. (CPN ) "irresistible" now that its stock has been beaten down by California's woes and the fears raised by Enron Corp.'s (ENE ) meltdown. "The more everyone else hates it," he says, "the more we like it."

By Carol Marie Cropper

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