A holding is Westlake Chemical ( WLK), which produces commodity chemicals. The stock slipped from around 65 in May to 41 now. Morris says that the decline has been excessive. The company has been pushing through price increases and the stock should climb when the economic outlook improves.

"The shares can be cut in half during a downturn, and then they double or triple during a rebound," says Morris.

Morris also likes Applied Industrial Technologies ( AIT), a Cleveland-based distributor of bearings, lubricants and other products used by manufacturers. Morris says that the company's earnings rise and fall along with the Midwestern industrial sector. Homestead has owned the stock on and off for the past decade. Morris likes to buy the shares when they sell for less than book value.

"This is a solid company with very little debt," he says.

Adirondack Small Cap

Adirondack Small Cap looks for unloved companies that are improving their competitive positions. During the past five years, the fund has returned 4.8% annually, outdoing 94% of peers. To find bargains, portfolio manager Matthew Reiner often buys former growth stars that have fallen on harder times.

"We will take companies that grow slowly as long as they are profitable and have strong cash flows," he says.

A holding is Smart Balance ( SMBL), a maker of buttery spreads. Several years ago the stock was a darling of growth managers. But sales softened after Wal-Mart ( WMT) introduced its own competing brand. Reiner says that Smart Balance is rebounding. "They are starting to improve their competitive position by rolling out a value brand," he says.

He also owns LSI Industries ( LYTS), which supplies energy-efficient lighting to gas stations and convenience stores. Gas stations can achieve substantial savings by replacing old-fashioned fluorescent bulbs with new LED systems. Reiner says that LSI is in a dynamic niche that should continue growing.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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