10 Questions With Eaton Vance Large-Cap Value Skipper Michael Mach

Otherwise, the philosophy in both funds is this: I want a diversified portfolio of companies that are characterized by three things:

1. Strong business franchise.

2. Attractive total return potential, as determined by expected growth rate plus dividend yield; I want this to sum to at least 10%.

3. Discount valuation.

Discount can be defined in a million ways. We defined it as selling at a discount to the S&P 500 on some meaningful valuation metric, like price to book, price to earnings, cash flow to EBITDA. And each company we examine, we calculate its intrinsic value.

So we might determine that if we look at all the timberlands, deep water ports, sawmills and a paper company worth $18 billion, subtract debt, maybe you end up with $15 billion. Divide by shares outstanding, the company's worth $30. If the company's worth $30 (per share), and the company's trading at $35, we're not interested. It's not a good value. But if it's selling at $20, we're very interested.

We want to be invested in companies that are good value, both in terms of our estimate of intrinsic value and in terms of selling at a discount vs. the S&P 500.

6. Are you having an easy time finding companies that meet your criteria right now?

It's always very difficult. (Laughs) But that's what makes it exciting.

We like to buy stocks that are trading at about a 33% discount to our estimate of intrinsic value. And today the average in the portfolio is about 40%. My worry list is about as long as anyone else's right now.

But I think that as a result of the anxieties that are in the market, we are being presented with a lot of attractive long-term opportunities. Stock prices are much lower, expectations are much lower, so it sets up the potential for some earnings surprises. If you get some positive surprises in the context of inexpensive stocks, that sets the stage for some good stock-price performance.

I think this is a good time to buy stocks if you have a three-year window. Maybe not, if you're a speculator; I don't know what's going to happen in the next year or so. We've got some wildcards out there -- geopolitical risks, for example. But for long-term investors, this is a pretty good time to get in the market.

7. Can you point to a beaten-down stock that meets your criteria?

The electronic-manufacturing and service arena is a technology-oriented arena that's generated a lot of excitement over the past few years. Many of the companies that operate in that space aggressively went out and made acquisitions to grow quickly and provide good returns. As a result, when you look at the companies today, they have compromised their balance sheets -- they don't have much financial flexibility.

A company in that space that we think has done a good job of preserving the integrity of its balance sheet, maintaining positive cash flows and positioning itself for wonderful future growth is Celestica(CLS Quote).