Cash and Controversy Attract Rich Cervone

Fund manager Rich Cervone's stock-picking strategy, "cash flow and controversy," sounds like it could be a Jane Austen novel knockoff. But while the strategy isn't a romantic classic like Pride and Prejudice, shareholders are enchanted with the fund's returns.

Cervone and co-manager Jim Wiess have been dictating the direction of the Putnam Investors fund (PINVX) since the summer of 2002. Over the past three years, the large-cap blend fund has returned an average of 19.36% annually, more than 17 percentage points better than the S&P 500. Cervone attributes the success to buying stocks that are stumbling in the near term but have the potential to generate lots of cash down the road. The fund is up 3.5% year to date.

TheStreet.com sat down with Cervone to learn what plot twists he has in mind for his shareholders.

The Street.com: You say you like to look for stocks with a mixture of "cash flow and controversy." That's pretty catchy. But what does it mean?

Rich Cervone: When Jim Wiess, my colleague on the Investors fund, and I talk about cash flow and controversy, we are referring to a type of situation in the stock market where you have a company that is likely to generate significant future free cash flow that is temporarily in a controversial situation, which could cause the stock of that company to be undervalued.

Investing is really the act of laying out cash today to receive more cash in the future. When you purchase an equity security, you are buying a piece of a business -- and a business is worth the present value of the future cash that it will generate for its owners. Our strategy in running the Investors fund is to view equities as streams of cash flows. We are simply trying to purchase, for our clients, a lot of future cash flow for a low price. Controversy frequently creates low prices, so whenever we see it, we take a look, because there could be a great investment opportunity in the midst of that controversy.