Value fund managers, who have been snapping up large company stocks they expect to perform well in an economic rebound, say they have time on their side. The 17% decline in the S&P 500 between October 2007 and early March created some longer buying opportunities. Overall, stocks at the end of the first quarter were trading at just 14 times projected earnings.

Value stock funds were down about 10% through mid-March. But many value stocks typically perform well when the business cycle turns north. In addition, value and growth stocks take turns outperforming each other every few years. So value may be poised for a rebound after lagging growth stocks for much of 2007.

"We are finding good values, and stocks are getting cheaper on a daily basis," says Ron Muhlenkamp, manager of the Muhlenkamp Fund. "Large-company stocks represent good relative values because they have underperformed for some time."

Muhlenkamp was shying away from most financial stocks, pending a clearer picture of how the subprime meltdown has affected bank, brokerage and insurance company financial statements. In 2007, he also reduced his positions in home builders and consumer cyclicals, while increasing his stake in capital goods and technology.

He recently bought Berkshire Hathaway-Warren Buffett's company. The company had $45 billion in cash and has been buying distressed bonds. In addition to profiting from the fixed-income market, Buffett has been taking positions in companies that include U.S. Bancorp, CarMax and Kraft. He believes these companies are well run and have strong business models.

Muhlenkamp has also accumulated shares in IBM, Oracle, Corning Inc., Cisco Systems and Caterpillar, companies that are benefiting from the weak dollar, that have above-average returns on equity and that have revenue growth of more than 10%. Although he favors large-cap stocks, about 25% of Muhlenkamp's portfolio is in midsize companies that have high returns on equity. But smaller stocks should outperform larger stocks when the economy emerges from recession. The fund's average holding sports a return on equity of 26%, long-term earnings growth of 11.5% and a P/E of just 12.5, reports Morningstar Inc., Chicago.

Susan Byrne, manager of the WHG Large Cap Value Fund, is focusing on stocks in economic sectors that are growing faster than other business sectors, such as consumer staples. These companies have high free cash flows of 5% compared with 4% for the market. With cash, companies can increase dividends, buy back stocks or pump money back into production.

The WHG fund's average holding is growing cash flows at 10%, according to Morningstar, while company earnings historically have grown at about 18%. Byrne owns firms that are benefiting from exports-including John Deere, Cisco Systems, Freeport-McMoRan Copper & Gold Inc., Oracle, Apache Oil and IBM. In addition, she favors MasterCard, as credit cards replace cash in developing economies, as well as other companies with global exposure, such as Colgate and Procter & Gamble.

All these stocks benefit from the weak dollar, since-although the companies' costs are in dollars-their overseas profits are in foreign currencies. This boosts earnings while keeping valuations attractive.

"We like the same stocks we liked six months ago," Byrne says. "This is not a serious recession. Some regions of the country are not hit as hard as others. People are working in the technology and software industries. Other companies are showing strong export growth."
Byrne may be on the right track about the recession, given recent economic reports. In January, wholesale inventories rose nearly 1%, while sales increased almost 3%, says the U.S. Commerce Department. Meanwhile, exported goods rose 28% in 2007, and U.S. unit labor costs were at their lowest levels since the late 1970s.

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