Value Investing With Robert Friedman

They are the junkyard dogs of Wall Street, feeding on the discarded remains of unloved companies, and Robert Friedman is their leader.

Friedman is the chief investment officer of Mutual Advisers, the investment manager for the $21 billion Mutual Series group of funds. And Friedman's team doesn't just buy beaten-up companies; they buy "badly beaten-up companies," he says.

The strategy is to "buy companies that are trading at 60 cents on the dollar of current dollar value," says Friedman. The idea is to find businesses with existing assets that already exceed the price of the stock and try to realize that built-in value. The plan often leads Friedman's team to companies that have suffered a tremendous blow, making them unpalatable to most investors. It's called "value investing."

Although the strategy sounds risky, Friedman says it's less so than investing in expensive growth stocks, which he says carry a built-in downside risk and are more sensitive to down markets.

"The Mutual Series funds aim for solid returns in all types of markets," says Friedman. These funds don't take on the risk of the S&P 500, and investors shouldn't expect the same returns during go-go growth periods "like the one we've been in for the last five years." So far this year, the firm's six funds fall on either side of the benchmark with two out in front and four trailing.

Mutual Series Funds vs. S&P 500*
Fund	Year-to-date return	5-year average annual return
Mutual Shares (MUTHX)	10.8%	16.8%
Mutual Qualified (MQIFX)	10.6	16.1
Mutual Beacon (BEGRX)	11.6	16
Mutual Discovery (MDISX)	14.8	16.8
Mutual Financial Services (TEFAX)	12.1	N/A
Mutual European (MEURX)	21.6	N/A
S&P 500	13	26.6
*Returns through Nov. 10. Source: Lipper.

But Friedman will be the first to admit that buying distressed companies does not come without its own risks. Indeed, past blowups have been nothing short of spectacular. Remember Sunbeam(SOC)?

More recently, Bank One(ONE) shaved points off the fund firm's returns on news that it would fall short of 1999 earnings. Shares fell 27% on Aug. 25. At the time, the bank was among the top five holdings in four of the Mutual Series funds. Friedman recommended Bank One on "TheStreet.com" on Fox News Channel in July. He's back this weekend to tell us what he thinks about the stock now.

To be sure, not all of the Mutual Series basement bargains implode -- some rise as spectacularly as others fall. Telephone & Data Systems(TDS) -- another top five holding for many of the group's funds -- is up 162% so far this year.

Still, cashing in on winners like this can take time. And unlike the hoards of trigger-happy daytraders that ride the market daily, the Mutual Series managers have a little patience. "It's not an exact science," says Friedman. "When you are buying something at a discount you never know when [or if] the value is going to be realized."

In the case of TDS it took nearly four years for the market to see what these managers saw in 1995. That's when the fund firm first purchased the telephone service company's stock. "Most of the stock's gain occurred this year," says Friedman. "Often, it's a game of perseverance."

Once a stock's hidden value is realized, Friedman's group takes some -- if not all -- of the profit off the table and starts the bargain hunting process over again. When a firm's shares dwell too long in the bargain basement, the Mutual Series managers become activists, encouraging (and sometimes nudging) the laggard companies to help themselves capture Wall Street's attention.

And that's how Friedman picks his stocks. To find out what he's buying now, check out "Stock Drill" this weekend on "TheStreet.com" on Fox News Channel at 10 a.m. and 6 p.m. ET Saturday and 10 a.m. ET Sunday.

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