Salomon Brothers Fund Manager Doesn't Suffer From Self-Esteem Issues

I'm good enough, I'm smart enough and doggone it, people like me.

There are plenty of flagging value fund managers who would do well to take a page out of Stuart Smalley's guide to a healthier self-image by whispering these words to their reflections each morning. But Michael Kagan isn't one of them. His value-oriented Salomon Brothers Fund (SBF) is doing just fine. In fact, it's doing better than the market, outpacing the S&P 500 over the last one, three and five years.

Kagan looks for stocks that are trading at a discount to, but growing faster than, the market. Firms with strong fundamentals whose shares get pummeled by short-term misfortunes are favorite buys. One example is American Home Products (AHP), which Kagan says is growing on the strength of seven major new drugs introduced late last year but whose stock is suffering from diet-drug litigation.

The manager believes AHP's substantial $4.75 billion diet-drug reserves, coupled with the $1.8 billion "break-up fee" it received for terminating a merger agreement with Warner-Lambert (WLA), will offset the negative impact of litigation. That AHP is planning to sell its agricultural business is another plus for the stock, says Kagan.

He also likes Bell Atlantic (BEL) and calls it a "bread and butter" stock for his $1.8 billion fund. "The key to profitability in the telephone business is to start the call, carry the call and terminate the call," says Kagan. "And Bell Atlantic has a great footprint for doing that."

The two stocks aren't new to Kagan's fund. He recommended both during his Sept. 18 appearance last year on "TheStreet.com" on Fox News Channel. Neither stock has rallied since, but Kagan says he's still a buyer. He explains why in more detail on the show this weekend.

Compuware (CPWR) was another of Kagan's favorites in September. He has since eliminated his fund's position in the software and services firm after discovering its use of an aggressive accounting technique that he believes will eventually cause it to miss analysts' estimates and hurt the stock. "They were goosing their revenues using long-term receivables, " says Kagan. "It's legal and it's [a generally accepted accounting principle], but it doesn't mean I agree with it."

Though not the usual fare for a value manager, tech stocks also hold appeal for Kagan. His fund's technology weighting is about equal to that of the S&P 500's. Analysts on the fund hunt for companies with new products for which there is a growing demand, he says. Finding these firms before anyone else allows the value managers to buy stocks at what they consider a reasonable price. Cypress Semiconductor (CY) is one such company, according to Kagan. "Cypress has a special RAM type product for handsets," he says. "Orders on the desk already indicate explosive demand and the stock is cheap relative to other semiconductor stocks."

While that kind of rationale sounds more growth than value, Kagan's value bent isn't in question here. In the last year his fund's top performer was General Motors' Hughes Electronics (GMH), which he bought at 32 in 1998. The wholly owned GM subsidiary, which makes satellites, topped 100 this January. Oh yeah, and he bought Cigna (CI) last week just because its stock price "got stupid."

To hear more of Kagan's thoughts on investing and get Jim Cramer's take on his favorites, check out "TheStreet.com" on Fox News Channel this weekend at 10:00 a.m. and 6:00 p.m. Saturday, and again at 10:00 a.m. Sunday.

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