Fund Managers Covet These Cheap Stocks

The no-load fund is up 11% year-to-date and has returned an annualized 17.44% over the past three years. Its expense ratio is 1.5%.

Will Nasgovitz, co-manager of the $350 million HRSVXHeartland Select Value Fund (HRSVX), has been looking to buy stocks of companies of any size that trade at low valuations, such as 13 times next year's earnings. But he won't touch a company at any price unless he has a clear understanding of how much exposure it has to subprime mortgage crisis.

"We're focused on businesses with good balance sheets," Nasgovitz says. "We don't want to be worried. We're selling winners whose balance sheets have deteriorated because we don't want companies that are significantly leveraged. Those are not your friends now."

He especially likes railroad company Union Pacific UNP, which is down 17% from its 52-week high in July. He predicts it will have earnings of $10 a share by 2010, up from $5.96 for 2006.

Up 7.9% year-to-date and 18.31% annualized over the last three years, the no-load fund has an expense ratio of 1.25%.