Matthew Fahey of Marshall Mid-Cap Value Fund

Late last year, Fahey bought a stake in Coca-Cola Enterprises (CCE). At the time, investors were fixated on the technology sector and other racy stocks, leading them to ignore the soda maker, says Fahey. The money manager says he was drawn to the stock because it was trading at seven times earnings before income taxes and depreciation, and was generating cash. In addition, Fahey thought producers of soft drinks were on the verge of being able to raise prices, which would benefit the company.

Among stocks that have been in the portfolio for a long time, Fahey cites Bausch & Lomb (BOL), one of the fund’s top holdings, as typical of the kind of investment he likes. The company, which makes contact lenses and related products, sports a well-known brand name and looks good right now because its margins have been working their way higher, Fahey says.

The fund’s No. 1 stock at the end of last year was Countrywide Financial (CFC), a financial services company that primarily provides residential mortgages.

Countrywide’s stock is priced at about eight or nine times earnings, which Fahey thinks is “just too cheap.” He adds that although the company has been meeting analysts’ estimates, “the market doesn’t believe they can continue to put up the earnings they have” posted.

A stock that helped the fund’s performance last year, Fahey says, was Brunswick Corp (BC). Shares of the company, which makes recreational boats and engines, and bowling products, rose more than 60%, he says.

Marshall Mid-Cap Value also got a major contribution from Manor Care (HCR), a health care company whose stock climbed more than 80% in 2003, Fahey says. Manor Care has “flawlessly” executed its “strategy of increasing earnings” and cash flow, he says.

When it comes to selling, Fahey will unload stocks when they reach the price target he sets for them and there appears no reason for them to rise further. That led him to eliminate Covance Inc (CVD), a provider of laboratory testing services, from the fund about two months ago.

Fahey will also sell companies when their financial fundamentals weaken. That, he says, was what caused him to banish Cooper Cameron (CAM) from the fund in January. The company, which makes equipment for land-based and offshore oil and gas rigs, saw its stock drop late last month after is earnings lagged its own expectations. The company said revenues from subsea systems projects missed its target and it suffered late delivery penalties because the products were behind schedule.

In theory, Fahey says, he should hold stocks for two years. That breaks down to two quarters when the company is troubled; four quarters as it begins to right itself; and two quarters when it has returned to operating the way it did before encountering difficulties and is humming along. In the last stage, growth investors should start moving in.

In practice, stocks enter and leave Marshall Mid-Cap Value less frequently than they do similar funds. Fahey’s fund had a turnover rate of 39% last year, compared to 74.7% for the average mid-cap value fund.

Assessing the stock market, Fahey thinks it could strengthen further if the economy continues to grow by about 4%, giving corporations a chance to improve profits. By the end of the year, he says he envisions stocks rising above their current levels, but “not by very much.”

– Richard Diennor