Burrowing Deep for Health Care and Tech Bargains

When Lanny Thorndike researches potential investments, he burrows so deeply into the company that he could probably tell you how the Southeast sales director takes his coffee.

The co-manager of the $27 million-in-assets (CSMVX Quote)Century Small-Cap Select fund hunts for companies with earnings growth above their peers but with stock prices cheaper than their peers. Sure, everybody wants those companies. But for Thorndike and his team, the difference is the process: a methodical, in-depth analysis of the company's profitability, growth and valuation prospects. The process also includes talking with second-tier managers, competitors and vendors to make sure the company passes muster.

If this all sounds time-consuming, it is. But it's hard to argue with the results: The fund, first offered to individuals in early 2000, has returned an average annualized 14.86% a year for the past three years. Century Small-Cap Select ranks No. 1 among all small-cap growth funds over one- and three-year periods.

In this week's 10 Questions, Thorndike discusses his investing process and the companies it unearths. He counts several health care companies among his favorites, is lightening up on financials and is starting to find some compelling tech stocks. Which ones? Read on.

1. How have you managed to turn in the performance you have during these past few years?

Blind luck. (Laughs.)

No. I'm not sure I can attribute it to any one thing other than we spend a lot of time on balance-sheet investing -- looking at return on equity and growth in book value. Those are two metrics that we focus on more than other investors. If companies can't deliver above 15% return on equity over rolling three-year periods, those generally aren't the stories that interest us.

If we can see companies that can grow book value over five-year periods, if they are mostly growing through acquisitions it's very hard to do. We adhere to a couple of metrics that most other people don't really pay attention to. We focus on how you can return an investment on the money that shareholders give companies, which, at the end of the day, is what your shareholder equity number is.