John Buckingham looks to play a recovering economy.

Asking John Buckingham about the stocks in the Al Frank Fund is something like inquiring about flavors at a Baskin Robbins store. With over 350 stocks in its portfolio, this small-company value offering is one of the most diverse actively managed funds in the business.

Buckingham believes that having lots of stocks in different industries helps reduce risk. New purchases usually start at around .2% to .3% of assets, and rarely grow beyond the 1% mark. Because the firm follows over a thousand stocks Buckingham rarely speaks to company management, preferring instead to rely on "boring financial data, not interviews and slick presentations that promise future market domination."

With so many names in the portfolio, Buckingham has lots of stories to tell about his winners and losers. "We cast a big net," he says. "Some stocks are going to exceed our wildest expectations, and others will go to zero." He believes that the fund's track record shows that the fliers overpower the flameouts. "A stock can make more than 100%, but it can't lose more than that," he says. "We get it right about two-thirds of the time."

Getting it right has meant a big payoff for fund holdings such as Internet media company ValueClick and explosive detection products maker InVision Tech, which have generated triple-digit gains this year. But the fund has lost money on picks such as Briazz. Attracted by a sizable chunk of cash on the company's balance sheet, Buckingham picked up the stock of the sandwich shop operator at $1 a share in mid-2002. When a slow economy hurt sales, the company burned through its cash hoard and the stock dropped to 15 cents a share.

Once Buckingham finds a stock he likes, he'll typically hold it for three to five years, a practice reflected in the fund's low 28% portfolio turnover rate. Investors with a similar long-term mindset about the fund should be prepared for some gyrations. Although Morningstar puts it in the small-cap value category, its manager's penchant for below-the-radar screen companies with less than $500 million in market capitalization makes it jumpier than others in its peer group. Its best year was 1999, when it soared 60.4%, about 39% better than the Standard & Poor's 500 Index and 56% better than its Morningstar small-value category average. In 2002, it fell 26%, trailing the index by 4% and its category average by 16%. Propelled by a rally in small-company stocks, the fund has come roaring back this year, posting a year-to-date return of 46% as of September 30.

Buckingham believes that the economy will provide support for stock prices for the balance of 2003 and 2004, and that undervalued small-company stocks, in particular, should do well. "Over the last five or six years, we've seen a rotating bull market in which different sectors take turns doing well," he says. "This year, we've had a massive, across-the-board rally. This isn't just another false start." Developments that favor future growth include a spike in merger and acquisition activity, the positive impact of the dividend tax cut and diminished geopolitical concerns.

And then there is the still-low rate of interest on bonds and money market securities, which make stocks more appealing by comparison. To put that in perspective, Buckingham estimates that "it would take about 50 years for someone earning today's money market fund rates to match the gains in his mutual fund for this year alone." Despite the increase in interest rates over the last few weeks, he believes that the Federal Reserve will take steps to keep rates low to avoid deflation and ensure that the recovery takes hold.

In line with his bullish viewpoint on the economy, he calls homebuilders "among the best of all growth stocks, and trade for some of the lowest fundamental ratios in the value-stock universe." While mortgage rates have risen recently, they remain low by historical standards. At the same time, demand remains strong. In August, the Commerce Department reported that housing starts inched up 1.5% to a 17-year high in July, while the National Association of Realtors reported that sales of existing homes rose to their highest level ever during that month.

D.R. Horton, his favorite stock in the group, builds single-family, entry-level and first move-up homes. Rapid immigration and an aging population moving into smaller homes will likely continue to spur demand, while the economies of scale achieved by larger builders like Horton allow them to build homes for less money than their smaller counterparts. Despite projected earnings growth of 15% to 20% over the next three years, the company trades at just seven times estimated 2004 earnings, and 1.5 times book value. Other holdings in the homebuilding group include Beazer Homes and Standard Pacific.

Buckingham looks for a number of characteristics that he believes make a stock undervalued, and his criteria can differ from stock to stock. With the recent dividend tax cut, and money market funds yielding less than 1%, he has increasingly turned his attention to stocks with generous dividend yields. Fund holdings such as pharmaceutical giant Merck, telecommunications company SBC Communications and auto parts manufacturer Visteon have dividend yields of over 2.9%.

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