You could say that Whitney George's portfolio is full of market rejects. He has stocks that investors dumped when earnings growth fell sharply -- or that lost ground after quarterly profits fell short of forecasts. Others are in industries out of sync with the economic climate. Some failed to live up to an illustrious market debut.
His strategy: Find the gold among the dross, buy these stocks cheaply enough, and eventually they deliver terrific returns. The Royce Low-Priced Stock Fund (RYLPX ), which George manages, has earned an average total return of 12.1% a year since 1998, vs. 3.4% for its small-cap value peers. Says George, 44, who has been with the fund since its 1993 inception: "These are perfectly fine companies that got absolutely destroyed."
George capitalizes on his contemporaries' tunnel vision. Most small-cap managers are not only fixated on quick paybacks but also choose to concentrate on a few hundred names out of a cast of thousands. While George's mandate dictates that he buy only stocks selling below $20 a share, it hardly cramps his style: Of 8,200 stocks defined as small-cap, 7,000 are priced within his target range. The fund owns about 200 issues, with no more than 2% of assets in a single name -- a risk-management style that Standard & Poor's fund analysts laud. "You limit your bets no matter how much you like a company," says George. "You never know what's going to come out of the blue."
Only companies with strong balance sheets and lots of cash on the books can make the buy list. They have a better chance of surviving in a weak economy, he says. He has been leaning more toward biotech and tech stocks that fit the bill in the past year, where many interesting companies are now trading below the value of the cash they have on hand.
Human Genome Sciences (HGSI ), for instance, hit a high of $108 a share in 2000, and has since fallen to $6.80 as investors lost all hope that the company would ever develop a drug. They have about $130 million in net cash on the books, says George, and "all of the science they developed three years ago is still there, and then some."
The camaraderie at New York's Royce & Associates, a boutique firm that has $7.9 billion in assets under management, is a big plus for George. Colleagues share the same buy-and-hold vision and appetite for cheap stocks. "We are doing well now because the problems the market perceived with stocks we bought before have passed," he says. "And the stocks are popular again." If George can keep it up, his fund may never be out of vogue.
By Mara Der Hovanesian