May 12, 2003

Investing With Frank James and Barry James

An excerpt from the May 11, 2003, edition of The N

The father-and-son team of Frank and Barry James, co-managers of the $63 million James Advantage Golden Rainbow Fund (GLRBX), have begun to shift some of the fund's money from bonds into stocks.

"We've had a negative view of the stock market," Frank James, the father, said from their office in Alpha, Ohio, near Dayton. "Now we're getting indications that the stock market is in for a rally."

They see the biggest values in cyclical and industrial stocks, his son said. "These aren't stocks that we're going to buy and hold forever," he said, "but many of them are big bargains now and we can make big profits." About 50% of the fund's assets are now in stocks, with the balance in bonds. At the start of 2003, the mix was 40% stocks, 60% bonds.

Preserving capital is an important goal of the fund, Frank James said. The managers aim to accomplish that by finding undervalued companies that are neglected by Wall Street but that they believe have strong futures.

They use a computer model that screens mostly American stocks with market capitalizations of at least $200 million, ranking them based on ratios of price to earnings and price to book value, as well as earnings in the previous 12 months. Then they review the top 10% of companies identified by the model.

The managers say that they expect the stock market to be relatively stable in the first half of 2003 but that it may be more volatile in the second half if the economy weakens.

Under these circumstances, they have been seeking companies with strong cash flow. "Companies live and die by cash flow," said Barry James, "especially in economic environments like this one."

They are also avoiding debt-laden companies. "It's not just the accounting scandals that have pulled down some companies recently," Frank James said. "It was their heavy debt loads as well."

The bond portion of the portfolio is invested mostly in Treasury bonds with small stakes in high-quality corporate and mortgage-backed bonds.

The managers began buying shares of Pharmaceutical Resources (PRX), of Spring Valley, N.Y., in October 2002 and have paid $24.53, on average, for the entire position; the shares now trade at $40.05.

The company, which makes and is a wholesale seller of generic drugs, has strong relationships with health maintenance organizations and retail drug chains, Frank James said. Its earnings are rising rapidly, he said, adding that "retail chains are looking to cut their costs, and buying generic is one way to do that." The companyhas very little debt, he said, and a return on assets of 28%.

Ball Corp (BLL), the food and beverage container company based in Broomfield, Colo., has also had rapidly growing earnings, Barry James said. The managers began buying shares in May 2002, paying $45.39, on average; the stock is now at $55.99. Ball is known for producing goods used in home canning. "With the economy slowing and unemployment rising," he said, "people are looking for things to do themselves to save money."

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