Quick Take: The stock market’s recent rally is not an aberration, says Gary Craven, who has managed Evergreen Emerging Growth/A (EKAAX) since 1998.

It’s clear that the economy is steadying, and continued low interest rates and any tax cuts approved by Washington will give it added support, Craven argues. Also, more companies have been topping analysts’ earnings estimates than missing them of late, he says. These factors have led investors, who have shunned growth stocks the last few years, to look at them again, says Craven.

Evergreen Emerging Growth was up 12% this year through last month, versus gains of 4.1% for the average small-cap growth fund, and 4.8% for the Standard & Poor’s 500-stock index. For the three years ended in April, the Evergreen fund lost 17.2%, versus a loss of 17.3% for its peers, and 13% for the S&P 500.

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People have become more willing to consider growth stocks, high-yield bonds, and other relatively racy investments of late, says Gary Craven.

That can be advantageous to a money manager like Craven, who trolls for companies with expanding top and bottom lines in overseeing the $525-million Evergreen Emerging Growth Fund.

“We think the rally we’ve seen in growth is well founded,” Craven said from his office in Boston. “There’s a lot of money that could still shift” into that part of the stock market, he added.

Now that the uncertainties raised by the war in Iraq have been erased and the economy seems to be firming up, investors have been seeking higher octane returns than they can get in money-market accounts or value-oriented mutual funds, he said.

Craven instead focuses on companies he thinks can increase profits at double the rate of the gross domestic product, a gauge of the economy’s health. He also likes above-average returns on invested capital, and strong competitive positions.

When he spots a stock he wants, Craven tries to buy it at a discount to what he thinks a business is really worth. The portfolio of the Emerging Growth fund sported a price-to-earnings ratio of 23.69 at the end of last month, compared to 33.23 for the Standard & Poor’s 500 index.

Craven hunts for stocks among mid-sized companies, which he defines as those with market caps of $1 to $9 billion. He prizes these, he explained, because they can fatten earnings and revenues as quickly as small companies, while offering the stability and staying power of big ones.

“These are companies that are still young enough to be growing much faster than average,” he said. But they’re less risky “because they’re more likely to be long-term survivors.”

A stock that caught Craven’s eye late last year is Career Education (CECO), a for-profit provider of post-secondary educational and vocational programs in the U.S. and abroad. Craven sees the company benefitting as old workers in this country are displaced by young ones, and need to develop new job skills.

Also, Career Education’s online class enrollment has been increasing, which will help it generate above-average growth down the road, said Craven. He began buying the stock last October and has added to it since, most recently last month.

Another addition to the portfolio in April was drug maker King Pharmaceuticals (KG). King shares fell to their lowest level in four years on April 17, after it failed to file its annual report because of an inquiry by the Securities and Exchange Commission into King’s failure to correctly calculate Medicaid reimbursements. Craven, however, expects the cloud over the stock to lift, enabling it to snap back.

The No. 1 stock in the fund, which usually has 65-75 holdings, is QLogic Corp (QLGC), a maker of hardware for electronic data storage. In addition to demonstrating “very strong growth,” the company has been improving its competitive position compared to rivals like Emulex Corp (ELX), according to Craven.

Behind QLogic in the portfolio is Coach Inc (COH), which makes and sells fashion accessories such as handbags, scarves, and gloves. “Their products are flying off the shelves,” said Craven. “They have just the right blend of cachet and price to be attractive to a wide audience, and they’re experiencing tremendous success.”

The stock has risen lately, but so have analysts’ earnings estimates, and the shares’ P/E of 25 based on projected 2004 earnings remains attractive, Craven said.

Consumer-related stocks like Coach account for 29% of the fund’s assets, making up the largest sector allocation. Other holdings in that area include retailers Abercrombie & Fitch Co`A` (ANF) and Hot Topic (HOTT), and Chico`s FAS (CHS), which sells clothing and related fashions for women.

Among the fund’s other large individual holdings is XTO Energy (XTO), which ranks third in the portfolio. The oil and gas company, formerly Cross Timbers Oil Co., stands to gain because natural gas supplies have been shrinking due to rising demand, said Craven. In addition, XTO’s reserves of gas are among the best “of any energy company we could buy,” said Craven.

Craven will sell stocks if they start getting pricey, or if a company’s financial fundamentals appear to be eroding. For example, he said he sold Action Performance Cos (ATN) this month because the model race car manufacturer’s earnings disappointed him.

Similarly, Craven said he unloaded his stake in discount retailer Dollar Tree Stores (DLTR) in February because its profits didn’t meet his expectations