Instead, Rothberg looks for companies that dominate growing niches. The Hennessy managers prefer buying stocks that have below-average price-earnings multiples. To find bargains, the managers often buy when temporary problems push down prices of premier companies. "We will follow a company for years until some short-term disappointment gives us an entry point," says Rothberg.
A holding is American Tower (AMT), which operates the towers that transmit wireless phone signals. Companies such as Verizon (VZ) and Sprint Nextel (S) pay to use the structures. Revenue grew in recent years as cellular traffic exploded. The existing towers face little competition because it is difficult for rivals to win environmental permits necessary for building the structures. Rothberg argues the company can continue growing as it expands overseas. "International expansion will power them forward for the next decade," he says.
Another holding is Encore Capital Group (ECPG), a debt collector. The company purchases defaulted accounts from banks and finance companies. Rothberg says Encore has developed sophisticated systems for determining which debts to pursue and how to collect. As a result, the company has been able to generate higher returns than competitors.
Another solid focused fund is Weitz Hickory (WEHIX). During the past five years, the fund returned 9.8% annually, outdoing 96% of mid-cap blend peers.Portfolio manager Wally Weitz seeks dominant businesses with rich cash flows. A diehard value investor, he only takes stocks that sell at 30% discounts to their fair values. When Weitz can't find bargains, he holds cash. The fund currently has 30% of assets in cash. While the cash can be a drag on results in bull markets, it helps to stabilize the portfolio in rough times.
Weitz likes to snap up stocks after they have fallen out of favor. A holding is CACI International (CACI), which provides cyber security and information systems for the U.S. Department of Defense and other government clients. The shares sank last fall as investors worried that government cutbacks would hurt revenue. That provided a buying opportunity for Weitz. "We came to the conclusion that the company would generate a substantial amount of free cash flow over the next three to five years--even if demand from the Department of Defense declined," says co-manager Andrew Weitz. Another holding is TransDigm (TDG), a maker of aircraft parts. The company can generate reliable cash flows because there is steady demand for replacement parts, says Andrew Weitz. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.