Scavenger hunt

Dawn Alston Paige of Loomis Sayles looks for undervalued mid-caps

It’s Dawn Alston Paige’s job to conduct a daily stock market scavenger hunt. Instead of buying shares in the Microsofts or Pfizers that have blazed in the market, her fund, the Loomis Sayles Midcap Value Fund (800-633-3330), sticks to companies with a market cap between $1 billion and $5 billion (a figure calculated by multiplying the number of shares a company has outstanding by the share price).

As a value manager, she scrapes together recruits by identifying stocks that are cheap relative to the market. Paige’s starting point in her quest for “fallen angels,” which represent 20% of her portfolio, is the newspaper. “I look for companies with short-term problems that the market might have overreacted to,” she says. “There are lots of companies that report weak earnings one quarter or have a merger fall through; a lot of investors won’t tolerate missteps of any kind, and you’ll see the stock punished 10%, 20% or more in a hurry.”

That’s not to say that all has been cheery for mid-cap value managers. Investors have flocked to large cap stocks — the Goliaths that are seen as sure and steady when the economy teeters. The result: the Standard & Poor’s 500 index sped to a 28% gain last year while Paige’s fund, although in the top third of her investment category, gained 4.12%, thanks to a hefty 18% rally in the fourth quarter.

Time should be on Paige’s side. Mid-cap value investing more than holds its own against the giants. Between 1978 and 1995, mid-cap value stocks averaged a total return of 18.3%, almost 2.5% more than any large cap investment during the same period, according to Wilshire Asset Management. Paige’s fund, meanwhile, has averaged a 18.67% annual total return since its inception in June 1996. “In this kind of market, you have to be patient,” Paige points out. “Things have a way of turning around, as long as you hold the course.”

Paige says she’ll focus on stocks that trade at a minimum price-to-earnings multiple 20% lower than that of the overall stock market. These days, with the S&P 500 trading at a 27.6 multiple, that means any company hoping to catch Paige’s attention will trade at 22 or lower. And she doesn’t mind putting money in a company after Wall Street has ravaged shares — that is, if earnings look to hold up over the long haul.

That is what drove her to pick such stocks as Dean Foods (NYSE: DF), a dairy company; retailers Saks Fifth Avenue (NYSE: SKS) and Claire’s Stores (NYSE: CLE); regional bank Union BanCal (Nasdaq: UNBC); and utility company DQE (NYSE: DQE).

Paige’s Mid-cap Value Posse

Company

Exchange: Symbol

Current Price *

Est. 5-Yr.Annual EPS Growth

P/E

Why Stock Will Outperform

Dean Foods

NYSE: DF

$37.50

12.5

14.9

The producer of dairy products will benefit from a decrease in dairy prices, improving its margins and driving earnings growth

Low P/E relative to the market and dividend yield of 2.6%

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