Quick Take:

If the names of the companies in the SAFECO Small Company Value Fund (SFSCX) don’t sound familiar, it’s not surprising. Greg Elsen, the fund’s manager since its inception in 1996, hunts for undervalued stocks of little known companies below Wall Street’s radar screen.

Classified as a small-cap blend fund by Standard & Poor’s, the fund has outpaced similar offerings for more than a year. It was up 10.1% this year through April, and returned 18.2% in 2001. The fund’s peers gained 2.5% and lost 3.2% in those periods.

The Full Interview:

The investments Greg Elsen focuses on are often overlooked by others, and that’s fine with him.

Elsen sets his sights on “obscure” companies, which he defines as those whose stocks are underpriced because they aren’t widely owned by institutions or individuals.

Many of the businesses that make their way into Safeco’s Small Company Value fund also are not tracked by the big brokerage houses. “That’s not by design,” Elsen says. “It just works out that way.”

Of course, buying things that fly below most analysts’ radar screens can be advantageous, Elsen agrees, because when Wall Street starts touting them they can attract a lot of money and “run very fast.”

When it comes to valuations, Elsen wants stocks that are trading for less than their peers and the overall market, but that have the potential to become growth investments.

Although he prefers companies with strong balance sheets, Elsen says he is willing to own those with less-than-pristine balance sheets if he thinks their prospects are good.

For example, Rent-Way Inc (RWY), the fund’s No. 1 holding, has a heavy debt load, but “it’s a turnaround in progress,” Elsen says.

Rent-Way, based in Erie, Pa., leases computers, home entertainment equipment, furniture, appliances and jewelry to customers who agree to eventually buy the merchandise. Elsen says he began buying the stock in late 2000, after it got battered when the company disclosed errors in its accounting.

When the dust cleared, Elsen concluded that Rent-Way was generating revenue, but had a problem controlling expenses. He felt that, given time, the company could improve its margins, which he reasoned would boost its stock. Today, the company has tightened operations and its bottom line is strengthening, Elsen says.

The company yesterday reported second quarter earnings of $0.06 per share, compared to a loss of $0.16 per share a year earlier. Elsen adds that he sold some shares of the stock this week because it had risen in price.

A recent addition to the portfolio is Shaw Group (SGR), which provides engineering and construction services, primarily to the power generation industry. Investors soured on the stock early last year when building in that sector appeared to have peaked, Elsen says. However, he thought Shaw could weather a downturn because it had a “huge” backlog of orders, he says.

Shaw, which makes prefabricated piping systems, also stands to benefit from its acquisition this month of IT Group Inc., a hazardous waste management company, Elsen says. He maintains the deal will expand Shaw’s presence in government and environmental markets and should help drive its earnings higher.

Elsen bought the bulk of his Shaw shares for $20.50 on January 16 and has added to the position since. The stock closed at $35.15 yesterday.

Another company Elsen sees getting a lift from an acquisition is computer reseller Insight Enterprises (NSIT), one of the fund’s top holdings. Insight, which also sells software, bought Comark Inc. last month, a privately-owned competitor, to boost its presence in the government market. The deal also gives Insight access to larger companies than it previously served, Elsen says.

Two of the fund’s other biggest holdings are Hooper Holmes (HH), which performs health tests for insurers, and Regis Corp (RGIS), the world’s largest operator and franchiser of hair salons.

Hooper Holmes produces loads of cash and has little debt, according to Elsen. He expects its revenues to rise “markedly” this year over 2001, and sees earnings growing “a lot faster” than sales because its fixed costs are covered.

Regis, which owns the Regis Salons, MasterCuts and Supercuts chains, agreed last month to acquire the biggest European salon chain, Jean Louis David. In addition to its leading industry position, Elsen says he likes Regis because of its strong cash flow.

The $36-million fund currently has about 13% of its assets in regional banks and thrift institutions, which Elsen says have been able to increase their loan business despite the weak economy.

One of his favorites in the sector is Hanmi Financial (HAFC), a bank holding company whose Hanmi Bank specializes in serving Koreans in Los Angeles and other parts of southern California. Elsen likes the bank because about 30% of its assets bear no interest, lessening its chances of being hurt when interest rates rise.

The fund also has stakes in BankUnited Financial`A` (BKUNA), Macatawa Bank (MCBC) and Camco Financial (CAFI).