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.

Unlike other large-cap value fund managers, Matt Norris, of the Ivy Value Fund, is less sanguine about the market. "I'm not blinded by the valuations," he says. "Companies look cheap, but business fundamentals are weak and will stay weak for a while. Valuations won't save stocks if business fundamentals don't change."

Norris looks at stocks based on gross cash flow yields before capital expenditures. His average holding is growing cash flow at almost 9%. Meanwhile, the stocks are selling at just 1.8 times book value. Historically, Ivy's holdings have grown earnings at nearly 20%, Morningstar says.

In these uncertain economic times, Norris wants to own companies that are spending money wisely. But the companies must be selling at attractive price-to-book values. That has put him in insurance companies such as Travelers and Allstate. He also likes drug distribution companies, such as AmerisourceBergen Drug Corp., because the businesses are stable and experience inelastic product demand. In addition, he's buying Home Depot and JCPenney because these companies should perform well when the economy recovers.

Managers on the small-cap value side are also finding bargains. Mark Leslie, manager of the William Blair Value Discovery Fund, looks for the best ideas in each market sector. "We are finding opportunities in today's market," Leslie says. "In markets like this, we focus on companies that have a catalyst for change, like new management or restructuring. These types of moves will drive higher value for companies."

Leslie says small-cap performance runs in streaks of several years. Small-cap stocks have outperformed other asset classes over the past several years. So these stocks could lag larger stocks over the near term. Meanwhile, he was using the pullback to buy stocks with strong cash flow, strong balance sheets and strong return on invested capital. He is underweight in financial stocks and overweight in industrials and technology.

He's been accumulating shares in companies such as Varian Inc., which sells scientific instruments to health care and industrial companies. The company's profit margins are expanding. Another pick, Flowers Foods, produces bakery products. Although wheat prices are soaring, this company's hedging program locks in lower prices. Minerals Technologies makes coatings for paper products. A new CEO came on board last year and improved cash flow and return on capital, cutting back on poor projects and buying back stock.

Leslie is optimistic about the longer term and is fully invested. His average holding is selling at just 1.7 times book value, and cash flows are growing at 9%, while earnings are growing at about 20%, according to Morningstar.

Although earnings expectations are uncertain, many companies held by the fund report that inventories are being managed aggressively, that backlog growth is slowing and that order logs are positive, he says. "We are in for some short-term volatility and downside expectations until we get into the second half of the year, when the economy gets stronger. We are taking a hard look at cyclicals," he says.

Meanwhile, John Montgomery, manager of the Bridgeway Small-Cap Value fund, says his proprietary model is turning up values in business services, financial services and industrial materials. According to Morningstar data, the fund's average holding is selling at just 13 times earnings, while earnings are growing at 23%. But his average holding sports a price-to-book value of just 1.7. The companies are growing cash flows at 23%, and book values are growing at 14%.

This small-cap fund, up 7% last year, outperformed the Russell 2000 value index. But in the last quarter, his stocks dropped about 4%. Investors abandoned small company stocks in favor of large company stocks because of the deterioration of the economy.

Montgomery says his models use a combination of fundamental, financial and technical indicators to buy and sell stocks. The model has been picking up former growth stocks that are now value stocks, based on growth at reasonable prices.

His largest holdings are in the industrial materials, consumer cyclicals and noncylicals and financial companies. "The market is pulling back (as much as 50%) on the small value side," he says. "With the retrenchment of stock prices, we are buying growth at reasonable prices. There are more companies on the value side."

Montgomery says he has been accumulating shares of existing holdings as well as adding new positions. Last February, he bought stocks like Columbus McKinnon, which manufactures material handling equipment, and Gulfmark Offshore, an oil support services firm.