Value Veterans: Lot to Like in Stock Market

NEW YORK (TheStreet) -- With the stock market swinging wildly, plenty of shareholders are dumping stock funds and shifting to Treasuries.

But not all investors are gloomy. After the rough stock market of last summer, shares of many companies slipped to bargain levels, says Christopher Welch, portfolio manager of Diamond Hill Small-Mid Cap (DHMAX). "This is a time when you can find lots of very high-quality companies that are undervalued," he says.

Welch, a die-hard value investor, is hardly alone. Other veteran value fund managers say that they are buying at a time when good stocks are being dumped for little or no reason.

Among the eager shoppers are Stan Majcher, portfolio manager of Hotchkis and Wiley Mid-Cap Value (HWMIX), and John Buckingham, portfolio manager of Al Frank Fund (VALUX).

Welch of Diamond Hill looks for unloved companies that can grow and increase their value. When the stock market looks rich, he lets cash build in the portfolio. These days he has only 3% of assets in cash. That is down from more than 20% in cash during 2007, a year when stocks were rallying and valuations looked stretched.

After buying a stock, Diamond Hill often waits years for the shares to appreciate. The patient approach has excelled in downturns. In the collapse of 2008, Diamond Hill outdid the S&P 500 index by 7 percentage points, according to Morningstar. During the past five years, Diamond Hill has returned 2.6% annually, outdoing 92% of mid-cap value competitors.

Welch likes Juniper Networks (JNPR), a producer of routers and networking equipment. Juniper's earnings have disappointed investors lately, but sales should grow steadily, says Welch. "The company has a strong balance sheet and competitive technology," he says.

Welch also likes Quest Diagnostics (DGX), which provides clinical testing. Because of its large network, the company can conduct blood and pregnancy tests at low costs. Welch says that sales can grow at mid single-digit rates and that the company may be able to raise prices.

Another optimistic manager is John Buckingham of Al Frank Fund. Buckingham says that the list of positive economic indicators is steadily growing. Productivity gains and auto sales have been stronger than expected. Interest rates are low, and corporate balance sheets are strong. But investors remain wary. The fear has pushed the forward price-to-earnings ratio of the S&P 500 down to 11, one of the lowest figures in the last two decades, he says.

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