Quick Take: Companies of any size are eligible for entry into the Evergreen Omega Fund (EKOAX), but to catch the eye of lead portfolio manager Maureen Cullinane they have to increase profits consistently.

In addition to analyzing the financial characteristics of individual companies, Cullinane and her team look for businesses that stand to benefit from economic and demographic trends.

Lately, the managers have been finding the kind of stocks they like among technology companies, which make up a third of their holdings. The fund also has a big chunk of its assets in cyclical consumer stocks, which account for 23% of the portfolio. Another 20% is invested in health care companies.

Evergreen Omega, which has total assets of about $1.3 billion, was up 38.8% this year through November, compared to gains of 24.6% by its peer large-cap growth funds, and 22.3% by the Standard & Poor’s 500 index. The Evergreen fund returned 3.4%, on average, for the five years ended last month, while similar funds lost 1.7% and the index slipped 0.5%.

The Full Interview:

Earnings growth is the key factor when Maureen Cullinane decides whether to buy or sell a stock.

In choosing investments for the Evergreen Omega Fund, Cullinane, its lead portfolio manager, seeks companies that consistently fatten their bottom lines, preferably by at least 15% a year. Sometimes, she’ll accept less initially, but only if a catalyst seems to be working to boost future profits.

Improving margins are on Cullinane’s wish list, too, along with analysts’ estimates that get revised upwards and are then topped by actual results.

Beyond company-specific numbers, Cullinane considers economic and demographic trends, taking into account the direction of interest rates and inflation, and the strength of the dollar, among other things.

“We really kind of take a big picture view of the world and see where things are shaking out,” Cullinane says of herself and her team.

The fund can own companies of any size, but it usually ignores very small ones, Cullinane says. Currently, 15% of its holdings have market caps of $500 million to $2.5 billion; about half have caps of $10 billion or more; and the remainder have caps of $2.5 billion to $10 billion, she says. Evergreen Omega typically keeps 65-75 stocks in its portfolio.

In October, the fund bought a stake in Valeant Pharmaceuticals International (VRX), formerly ICN Pharmaceuticals Inc. Cullinane says she was drawn to the maker of prescription and over-the-counter drugs because its new management team is divesting unprofitable operations and refocusing its product lines. Also, Cullinane likes the prospects for viramidine, a new hepatitis C treatment Valeant is developing that would replace a drug whose patent protection is expiring.

Another relatively new addition to the fund is apparel retailer Chico`s FAS (CHS), which focuses on women aged 35 and older. The chain, one of the fund’s major holdings, has a good long-term record of increasing earnings, says Cullinane, who invested in the stock in July.

Shares of Chico’s have pulled back recently amid concerns that overall consumer spending during the holiday season will slacken, “but I think this company has enough catalysts that earnings should continue to move ahead,” she says. Among these is a program that rewards frequent shoppers with discounts, she explains.

A favorite of Cullinane’s is Intl Game Technology (IGT), a maker of computerized gambling machines that currently ranks second in the portfolio. The fund manager expects International Game’s latest offering, a machine that doesn’t require the use of cash, to become popular with casinos. That and the company’s other products should continue to boost its earnings, she says.

The fund’s No. 1 stock, and another one that Cullinane is particularly fond of, is Coach Inc (COH), an apparel and accessories manufacturer. A new design team has been adding things like “more stylish” handbags to Coach’s product lines to attract younger shoppers, she says. “They’re broadening their appeal, and their designs are quite stunning,” she adds. As for Coach’s earnings, which came in at $0.79 per share in fiscal 2003, she sees them rising to about $1.10 in fiscal 2004 and about $1.30 the following year.

Technology and telecommunications stocks account for 33% of the fund’s portfolio, comprising its heaviest sector weight. Within that group, a pet stock of Cullinane’s is Cadence Design Sys (CDN), which makes software for designing semiconductors, computer systems and telecommunications equipment. The company has switched from licensing its products to selling them to subscribers, which should result in improved and more consistent sales, according to Cullinane.

Another tech stock, SanDisk Corp (SNDK), has been one of Evergreen Omega’s best performers this year, says Cullinane, who has seen the fund’s shares climb to around $60 lately from about $25 in May, when they entered the portfolio. SanDisk makes chips for digital cameras.

Until late last month, the fund had owned a SanDisk competitor, Lexar Media (LEXR). But Cullinane says she sold the stock because it had begun to fall and she thought SanDisk had more potential to appreciate.

Generally, Cullinane says she will sell a holding outright if a company’s earnings growth slows dramatically, or its profits badly lag analysts’ estimates. Stocks that seem fully valued or overpriced will also be rejected by the fund, she says.

Looking at stocks over all, Cullinane’s outlook is optimistic through at least the early part of 2004. Beyond that point, however, interest rates may begin to increase, which could weigh on the market, she notes.

“I think next year might be a little bit more difficult,” Cullinane says. “It could be one of those years when we start off well and then give back some of those gains in the second half.”