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Fund Manager's Picks Must Do Well -- and Do Good

Robert Loest looks for undervalued stocks that are friendly to the environment and human rights.

How thorough a fund manager is Robert Loest? Well, before he buys a stock, he not only researches the company's ROIC (return on invested capital) and FCF (free cash flow), but he checks with PETA as well.

That's right.


, as in People for the Ethical Treatment of Animals.

A biologist turned naval officer turned fund manager, Loest practices a combination of ethical and value investing. And practically speaking, the strategy has been paying off. Loest's

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Integrity Growth & Income fund is up 7.3% year to date, almost two percentage points better than the

S&P 500

. Over the past three years, the fund has returned 13.5% annually, beating the index by a percentage point.

Loest's first call when searching for stocks, however, is not to the environmental lobby. A bottoms-up fund manager, he initially searches for stocks with consistently high FCFs and ROICs. Then he looks for companies trading at a discount of 30% or more to fair value, which he derives by discounting future free cash flows.

Once these fundamental screens are complete, he assesses the ethical aspects of the remaining companies. Manufacturers have their environmental records scrubbed. Outsourcing companies have their human rights histories investigated. And when it comes to drug companies, for example, Loest calls organizations like PETA to make sure a company respects animal rights.

"I have a doctorate in biology, so I am very interested in ecology," Loest says in an

interview on TV. "That sensitizes you to environmental and animal rights issues."

And what did his stint in the U.S. Navy teach him about managing money?

"I was a supply corps officer and that position requires a tremendous amount of discipline and attention to financial detail," says Loest.

Although Loest is a bottoms-up stock-picker, the former naval officer sees stormy seas on the economic horizon -- mostly due to the housing slump and credit crisis.

"We are in a really risky period, so investors need to be cautious, maybe even sit on their hands," says Loest. "The first six months of 2008 will be tough for the economy, because a huge number of variable mortgages will be reset. Many people will be forced out of their homes, which means another shoe is likely to drop."

That said, Loest says there are still some good bargains out there, especially among multinational blue chips with high

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dividend yields.



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is cheap, plus it has the majority of revenue coming from overseas," says Loest. "That's preferable because the global economy is holding up."

He also says

Johnson & Johnson

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has not been this cheap "since the first time Hillary Clinton tried to fix the nation's health care system."

Loest also leans toward mega-caps, because small-caps tend to do the bulk of their business domestically. Not the place to be if you fear a major economic slowdown in 2008.

For those pessimists looking to own some counter-cyclical plays, Loest suggests bankruptcy software provider

EPIQ Systems


and debt collector

Portfolio Recovery Associates

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Before joining, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.