Scott Brayman of Sentinel Small Company Fund

S&P Rank: 5 StarsJuly 10, 2003A Psycho

Quick Take: Scott Brayman, lead manager of the Sentinel:Small Company Fund/A (SAGWX), has an office in Montpelier, Vt., certainly a more tranquil setting than Wall Street. That may give him a psychological edge over his more pressured fellow stock pickers in New York, he says.

The fund's returns have given it an edge over its peers. Sentinel Small Company, which Brayman has piloted since 1996, rose 16.7% this year through June, versus 16.3% for the average small-cap blend fund. For the five years ended last month, the fund gained an average annualized 11%, versus just 2.6% for its peers.

In choosing investments, Brayman looks for undervalued stocks of companies with strong returns on capital. He focuses on those with market caps of $500 million to $1.5 billion.

The Full Interview:

There are plenty of talented people in the investment business, and what differentiates them is probably very subtle and intangible, says Scott Brayman, who runs the Sentinel Small Company fund. That he works in the Green Hills of Vermont and not the concrete canyons of Manhattan may give him a leg up on other money managers, he suggests.

"I don't have any hassles commuting," says Brayman, noting that there are no traffic lights between his home and his office. "I mean, that's got to give me an advantage in terms of my state of mind."

In picking stocks, Brayman looks for companies with a competitive advantage, like a patent, as well as those whose earnings top their peers. Before he scans for these characteristics, however, he wants to find businesses that feature fat returns on capital; strong cash flow and balance sheets; high margins; and low debt.

Brayman wants to buy stocks when they're selling at a discount to what he thinks a company is actually worth. That gives him a shot at profiting when investors bid the shares up, or if the company is acquired, he says.

A stock that Brayman added to his portfolio late in the second quarter this year is Investors Finl Svcs (IFIN), which provides securities processing and other administrative financial services. The company is "a terrific grower" of earnings and revenues, and stands to benefit as businesses increasingly contract out their back office work, says Brayman. His average cost in the stock is about $27.50. It closed today at $31.22.

In the previous quarter, Brayman bought a stake in La-Z Boy (LZB) because he thought the furniture maker's stock was attractively priced. His shares cost about $18.20 on average. They closed today at $22.78.

Consumer stocks like La-Z-Boy account for approximately 21% of the assets of the $464-million fund, which typically holds 75-100 stocks. Brayman's holdings in the sector also include Church & Dwight (CHD), which ranks third in the portfolio.

The company's brands, such as Arm & Hammer baking soda, and Brillo soap pads, make it stand out, according to Brayman, who first invested in the company about two years ago. His shares cost $27.58 on average. The stock closed today at $33.57.

Brayman names another consumer stock, Hain Celestial Group (HAIN), as a favorite. The company makes natural and organic foods, the market for which, Brayman says, is expanding faster than that for the overall food industry. Brayman also says the stock is trading at a discount to Hain's true value. In addition, Hain has been recruiting seasoned executives from larger rivals, "and I think you're going to see that make a material difference in their execution in coming years," he says.

Hain stock has been in the portfolio for a couple of years. Brayman's shares cost $15 on average. They closed today at $15.80.

Among his other stocks, the fund manager says he particularly likes Integra LifeSciences Holdings (IART), which makes medical devices and implants used primarily in neurosurgery, orthopedics and soft tissue repair. Integra has been acquiring smaller companies, and is "growing quite rapidly," according to Brayman. He began investing in the Plainsboro, N.J-based company last fall, and added to the position recently. His shares cost $18 on average. They closed today at $24.65.

The No. 1 stock in the portfolio is ABM Indus Inc (ABM), which provides janitorial, parking and securities services for commercial buildings. Although these are not "dynamic" operations, they consistently churn out profits and sales, says Brayman, adding that ABM is one of the biggest players in its fields, and there will always be a need for what it does. "You can bank on them being in business ten years from now," he says. "And you can bank on the dividend that they pay."

Brayman's average cost in the stock, which has been in the fund for a couple of years, is $13.95. It closed today at $15.73.

When it comes to selling, Brayman will vanquish a holding from the fund if the stock's valuation becomes pricey. He cited that reason for his sales this month of O2Micro Intl (OIIM), an integrated circuit manufacturer, and Kronos Inc (KRON), which makes labor and payroll management software.

In the same vein, Brayman is skeptical of the market's rise over the last few months because he thinks stocks are "very overbought." Also, peoples' renewed appetite for companies with no history of profits worries him.

"I'm concerned that too many professional investors are more afraid of missing the rally and underperforming their peers than they are afraid of losing money for their clients," Brayman says. "And I think that's an incredibly unhealthy environment."

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