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Small Value Funds Sail Along


A cyclical holding is FreightCar America (RAIL), which makes railcars that are used to haul coal and other commodities. Sales have collapsed because of the weak economy. But the company holds $11 per share in cash, a big cushion for a stock that trades around $27.

Creatura says that FreightCar dominates its niche and thrives when the economy booms. In 2006, the company earned around $10 a share. Now orders are beginning to recover. "This is a deeply cyclical business that is coming up from the bottom of a cycle," he says.

Creatura also likes Skechers (SKX), which makes casual shoes and clothing. He says that the shares sell for a price-earnings ratio of only 7 because investors worry that earnings could be hurt by changes in fashion. Creatura concedes that some lines could prove to be duds. But he argues that much of the business depends on reliable sales for shoes and other products that customers purchase year in and year out. "At the heart of this company is a reliable consumer staple business," he says.

A top-performing fund is Homestead Small Company (HSCSX), which returned 7.8% annually during the past five years. The fund snapped up deeply depressed shares in the downturn and scored big gains when markets rebounded.

In 2008, portfolio manager Peter Morris bought retailer Nordstrom (JWN) after the shares fell so far that the chain slipped into small-cap territory. Morris sold the shares after they rebounded.

These days Morris holds many boring cyclical companies. A favorite holding is Westlake Chemical (WLK). The recession depressed chemical sales, but Morris says that eventually demand will recover.


Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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