Robert Costomiris of Strong Small Company Value Fund

Quick Take: Robert Costomiris, the portfolio manager of the Strong Small Company Value Fund (SCOVX), wouldn’t mind if stocks went nowhere for the rest of this year. “We’re apt to do better in a market that’s boring,” he says.

That’s because funds like his that buy undervalued stocks tend to lag when growth investments become fashionable and push equity indexes higher, Costomiris says.

In running the fund, Costomiris looks for profitable small companies whose debts are under control and whose assets don’t fluctuate widely in value. He hunts for shares that are inexpensive compared with the company’s cash flow. He likes to buy stocks that are not widely followed by analysts, or that are out of favor with them and investors, because these investments can appreciate when Wall Street discovers and embraces them.

Costomiris has managed the $112 million Small Company Value Fund since its inception two years ago. In that time it has stayed well ahead of its rivals. The fund returned 62.5% last year, while the average small-cap blend fund was up 44.0%. The Strong fund was the top performer in its category through the first half of this year, gaining 16.3%, versus 6.8% for its peers. The fund is too new to be ranked by Standard & Poor’s.

Costomiris uses the same investment approach in running the Strong Mid Cap Disciplined Fund (SMCDX), which invests in mid-cap stocks, and the Strong Advisor US Value Fund/K (SEQKX), which focuses on large companies.

Wells Fargo (WFC) recently agreed to acquire Strong Capital Management, which runs the Strong Funds, and is expected to to consolidate some of them, but it has not yet decided which ones. Shortly before the deal was reached, Strong Capital and its founder agreed to pay more than $140 million to settle charges related to improper trading of the funds

The Full Interview:

All else being equal, Robert Costomiris would prefer that people loathe a company he’s investing in.

Costomiris, who manages the Strong Small Company Value Fund, likes stocks that are relatively unknown on Wall Street, too. “But it’s actually equally as impressive to us,” he says, “if the company is well followed, but all the analysts hate it.”

Stocks that are unloved or that fly below the radar screens of big brokerage houses can soar when the investment community begins tracking and warming up to them, he points out.

Buying stocks when others have soured on them is one part of Costomiris’s investment strategy. When it comes to financial criteria, he wants to own profitable businesses with what he describes as “manageable” debts, whose shares are priced low relative to the company’s cash flow.

If a company isn’t generating earnings or cash, that’s all right, the fund manager says, provided he thinks it will soon.