Q&A: Soldier of Misfortune

Editor's Note: The following is an excerpt available exclusively at TheStreet.com from an interview originally published by Value Investor Insight.

"There are only two types of companies," says money manager (and RealMoney.com contributor) Arne Alsin. "Those with problems and those that are going to have problems."

Alsin, who started Alsin Capital Management in 2001 after winding down a successful family money-management business, isn't the pessimist that statement implies. "I just wait for premier companies to temporarily falter and disappoint," he says. "I'm an opportunist."

Investors today are overreacting more than ever to short-term influences, Alsin says, creating plenty of opportunity to find deeply discounted bargains.

On what specific metrics do you typically focus?

I think the number one variable in the investing equation that Wall Street overlooks is margin leverage. Most investors focus on leverage from sales growth, which is relatively easy to figure out and everybody looks at that. But in the great organic growth stories, such as Starbucks (SBUX Quote), Home Depot (HD Quote), Wal-Mart (WMT Quote) and Bed Bath & Beyond (BBBY Quote), a lot of the share-price upside has come from these companies increasing operating and net margins as they grow.

Home Depot has gone up roughly sevenfold in the past 13 years and margin leverage -- their net margins grew from 4% to 7% -- has been responsible for fully 40% of that gain.

Margin leverage tends to go along with a company having an enduring competitive moat. When I think of the great organic growth stories, it's rarely based on some breakthrough product. The products are often simple but the source of the greatness is in the execution, which is reflected in the operating statement. Wal-Mart is just flat-out better across the board -- distribution, procurement, laying off SG&A across a larger base of revenue.

In the aggregate, that dynamic is what produces and reinforces the moat. If you get this type of company early enough in the story, which is what I try to do, you will get a tremendous amount of appreciation from both sales and margin growth. I just think that's the most overlooked source of big money gains I can think of.