Treasure In The Lower Depths

Clay Peterson talks about his bottom-fishing finds

How does Parkway Advisors find good deals in brand-name stocks? Carl "Clay" Peterson, CEO of the Abilene (Tex.) firm, also manages its new Memorial Value Equity fund, an offshoot of an institutional fund that has gained an annualized 7.5% since May, 2001. Peterson spoke with Personal Business Editor Lauren Young about investment opportunities.

How do you pick stocks?

We focus on the Standard & Poor's 500-stock index, trying to identify stocks that meet 12 criteria for value investing, including low price-to-sales and low price-earnings ratios, and strong return on equity. We rank the S&P 500 by performance over the last 52 weeks, and we focus on the bottom 125 companies using a "reversion to the mean" concept: If a stock goes from $10 to $5, its mean price is $7.50. And if it fits our investment parameters, we try to buy it under that mean. We are looking for that unknown value that nobody else yet sees.

Many financial stocks show up on your list. Are they still good investments?

Rising interest rates may hurt some of the banking and financial-services companies that are big players in the mortgage area. But many of the best financial companies have diversified into other businesses that won't be hit by rising rates. The fund owns Citigroup (C ), J.P. Morgan Chase (JPM ), and Bank of America (BAC ), which all have significant credit-card and investment groups.

What else is popping up?

Microsoft (MSFT ) passed through our search criteria, and we added it in March. Microsoft is cleaning up patent-infringement and antitrust issues. Yes, top-line growth is coming down, and it is hard to grow sales at double-digit rates, but they have a new operating system coming out in 2006.

The retail sector seems to be the up-and-coming out-of-favor group. There's some concern that American clothing retailers are dull, that they don't know how to market. We already own Liz Claiborne (LIZ ) and Kohl's (KSS ). What's surprising is that even Wal-Mart Stores (WMT ) is on our list.

Is there any industry group that never makes the cut?

The airline industry was one we always shied away from because of problems they have with labor issues and government regulations as well as fuel prices. But recently, Southwest Airlines (LUV ) showed up on our screens. Its past has been stellar, and it is opening in the large Philadelphia market, so we bought it.

    Before it's here, it's on the Bloomberg Terminal.