Quick Take: Investors lost faith in the FMI Common Stock Fund (FMIMX) in the late 1990s when its style of buying undervalued stocks was out of favor, says portfolio manager Patrick English. “A lot of people were questioning our abilities,” he says. “But we didn’t change. We kept doing what we said we’d do, and so we went from being dumb to being smart overnight.”

English’s facetious remarks aside, the fund’s performance has perked up over the last two-and-a-half years as value stocks have become fashionable.

After lagging the Standard & Poor’s 500 Index with a total return of 6.5% in 1999, FMI Common Stock gained 19.1% in 2000 and 18.6% in 2001, topping the index both years. The $87-million fund had gained 6.2% this year through May, while the average small-cap value fund was up 6.6%. For the five-year period ended in May, the fund returned 12.5% annualized, versus 10.9% for its peers.

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Technology stocks typically don’t take up much room in the FMI Common Stock fund, which focuses on inexpensive fare. They can be pricey.

But the sector has been battered down over the last two years, so “that’s where value is right now,” says Patrick English, who helps manage the portfolio.

While the fund still has only about 8% of its assets in tech, two of English’s most recent investments are software makers: Autodesk, Inc (ADSK) and Parametric Technology (PMTC), which make programs that are used for designing products.

Both have large, loyal customer bases, says English, who prizes that quality in the companies he buys. They also have “lots of cash, and no debt,” he says. And both are poised to benefit if businesses start spending more on information technology, he says, adding that “eventually, companies will begin loosening their purse strings.”

So far this year, English hasn’t made much money on Autodesk, and Parametric has been a loser, but he’s optimistic about the future for the stocks, which he began buying about six months ago. His average cost in Autodesk is about $13 per share; it closed today at $13.33. His Parametric shares cost about $5 on average; they closed at $3.80 this afternoon.

Outside of technology, the managers began investing in Watson Wyatt`A` (WW) late last year, a consulting company that advises businesses on how to attract, retain and motivate workers. “They have an exceptional reputation” in their business, English said. The Washington, D.C.-based company is also debt free, and its stock carries a reasonable price-to-earnings mutltiple of about 15, he says. English initially paid $22-$23 for the stock; it closed today at $24.61.

In picking stocks, English explains, “we’re trying to find superior business models at discount prices.”

Other attributes the co-manager looks for in companies include above-average returns on invested capital, and strong margins. He wants to buy stocks of companies that are cheap compared to their own history, their industry peers, and the market. Usually, he finds the qualities he prefers in companies with successful track records, but that are experiencing a temporary problem that has hurt the stock.

The fund focuses on companies with market caps of $500 million to $2 billion, and holds 35-40 stocks, a number that English says provides adequate diversification while making it easier to analyze companies.

Its No. 1 holding is waste hauler Republic Services (RSG), which English likes because of its management. “These guys have been very conservative on their accounting,” he says, and “their operating performance has been consistent, even in a weak economy.” In addition, Republic Services’ stock carries an attractive price-earnings multiple of about 14, he says.

A price-earnings multiple of about 10.5 is one of the things that makes insurer Old Republic Intl (ORI), the fund’s second-largest holding, attractive to English. Also, the company’s property and casualty business is “very solid,” according to the fund manager.

English plans to hold stocks for three to five years, but he’ll sell them if they become expensive, or if a company’s financial fundamentals appear headed for an extended downturn.

For example, he eliminated retailer Big Lots (BLI) from the portfolio at the start of this year because its stock had appreciated. Over the long term, he thought the company faced “an uphill battle competing against” discount chains like Wal-Mart Stores (WMT) and Target Corp (TGT).