Quick Take: In picking stocks for the AIM Small Cap Equity Fund/A (SMEAX), lead portfolio manager Paul Rasplicka looks for small companies with growing top and bottom lines whose stocks seem undervalued.

Rasplicka and co-manager Michael Chapman also like to find companies with strong balance sheets and cash flow, and whose quarterly results exceed analysts’ estimates. Rasplicka also helps pilot the AIM Capital Development Fund/A (ACDAX), which invests in mid-sized companies.

The Small Cap Equity Fund, which started operations in August of 2000, returned 40.5% this year through November, while its peer small-cap value funds gained 37.3% and the Standard & Poor’s 500 index rose 22.3%. The AIM fund rose 10.1% on average for the three years ended last month, compared to similar funds, which returned 14.3%, and the index, which slid 5.5%

The fund is set to close to new investors when its assets, which now total $496 million, reach $500 million.

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Paul Rasplicka belongs to that group of money managers who look to own growing companies whose stocks appear reasonably priced, a practice known by the acronym GARP.

“Hopefully, we can buy them when the market is not giving them credit for the strength of their business,” or they’re temporarily out of favor for some other reason, Rasplicka says of his fund’s investments.

In addition to inexpensive shares, Rasplicka seeks companies with solid balance sheets, strong cash flow, and good returns on capital. In addition, he favors those for which analysts raise estimates and that exceed those expectations. Companies that are increasing their share of a growing market will pique his interest, too.

The fund typically owns 100 companies with market caps of $200 million to $1.5 billion, and normally limits position sizes to 1% to keep damage from losers to a minimum. “It’s just a way to manage volatility through diversity,” Rasplicka says.

Late last month, the fund bought shares of Digital Insight (DGIN), which provides information technology services to banks and other thrift institutions. Digital Insight’s profits are expected to increase by 45% next year, but it’s shares trade at about 25 times projected earnings, Rasplicka says, adding that its returns on equity and margins are improving.

Another addition to the portfolio in November was auto parts retailer Pep Boys-Manny,Mo,Jack (PBY). Rasplicka says he was drawn to the stock because it carries a price-to-earnings multiple of 20, while the company’s bottom line is expected to grow by 41% in fiscal 2005. Rasplicka says he also likes the company because it’s adding new products, including brand name tires, to its stores, which should bring in more shoppers and boost sales.

Earlier, in April, AIM Small Cap Equity bought a stake in Sierra Health Services (SIE), a managed health care company. At the time, the stock’s P/E of 8 struck Rasplicka as very undervalued. The multiple has ticked up to 10 recently, but the stock continues to look good because Sierra’s earnings have risen “dramatically,” and at the same time the company has been generating lots of cash that it’s used to buy back its stock, Rasplicka says.

Rasplicka says he also likes Las Vegas-based Sierra because it is the dominant player in its field in that area, which is itself growing, giving Sierra an opportunity to add to its membership base.

The fund’s No. 1 stock is investment banker Friedman Billings Ramsey Group `A` (FBR), which, Rasplicka notes, sports an attractive dividend yield of 6.3%.

Industrial companies, which Rasplicka describes as an eclectic mix of things like manufacturers and transportation companies, account for the biggest piece of the fund’s assets — 21%. The fund manager sees these businesses benefitting if the economy continues recovering.

Among these stocks, the best performer this year has been Wabash National (WNC), a truck trailer maker whose stock has doubled since he bought it in June, Rasplicka says.

Elsewhere in the group, Rasplicka cites Landstar System (LSTR) as a winner. The company provides transportation services to shippers, primarily in the U.S.

The fund’s industrial holdings, as Rasplicka defines them, also include Pacer International (PACR), a trucking firm; waste hauler Casella Waste Sys `A` (CWST); and prison operator Corrections Corp. of America (CXW).

Just as Rasplicka hunts for cheap stocks, he will trim a holding or sell it outright if it becomes expensive. For example, in October, he unloaded Transaction Sys Architects`A` (TSAI), which makes software for electronic commerce, because, he says, its shares had run up, but he saw no evidence that the business was “getting dramatically better.”

Deteriorating or suspect financial fundamentals can also lead Rasplicka to reject a stock. That, he explains, was the problem with InterVideo Inc. (IVII) a maker of software for producing and editing DVDs, which he sold early last month after buying the stock in its initial public offering in July. Results posted by InterVideo in its first quarter as a publicly traded company failed to meet Wall Street estimates, “which is a pretty big sin for a new company,” Rasplicka says.