Susan Suvall of TCW Galileo Value Opportunities Fund

Traumatized companies can recuperate in the TCW Galileo Value Opportunities Fund, provided their convalescence is expected to be relatively short.

In overseeing the fund, Susan Suvall (formerly Schottenfeld) says she and Nicholas Galluccio look for businesses experiencing “an earnings trauma” because of a problem the portfolio managers consider only temporary.

The pair hunt for undervalued stocks of profitable companies that generate free cash and have strong balance sheets. Shares trading at the low end of their historical range are on their check list, too. Their buying decisions are based on what they think a company will earn over the next two years. The fund focuses on companies with market caps of $500 million to just over $10 billion, Suvall says.

One category of investments the fund is broken into is companies trading below their breakup value. An example of this type of holding, Suvall says, is Transocean Inc (RIG), which provides offshore drilling services for oil and gas wells.

Suvall expects the company to get a lift from the sale last February of part of its interest in its TODCO`A` (THE) oil and gas drilling subsidiary. In addition, she sees Transocean benefitting as the rebounding U.S. economy spurs big oil companies to spend more on production.

Another section of the portfolio consists of turnarounds. Suvall cites Health Net (HNT), which provides managed health care services, as a typical investment in this group. The stock, which ranked second in the portfolio at the end of June, has been hurt because the company underestimated medical costs and consequently mispriced its services, Suvall says. But “management has the situation under control” now, she says.

Health Net stock has been trading for around $26 lately. But “we think it’s worth in excess of where it’s selling right now,” Suvall says. She declines to elaborate.

Similarly, Novellus Systems (NVLS), a semiconductor equipment maker, is “worth a lot more than the stock is selling at now,” Suvall says. (The shares have been trading for about $26-$31 this month.) She cites Novellus as an example of what she calls “broken growth” stocks, which make up a third part of the portfolio.

Investors have been shying away from semiconductor stocks recently because of concerns about a slowdown in demand. But Novellus and its rivals have said they expect business to pick up, Suvall says. The company also looks good to her because it is the second-largest in its industry, and has “an incredibly clean balance sheet,” she says.

At the end of the second quarter, technology stocks like Novellus accounted for about 25% of the holdings of the fund, whose sector weights, Suvall says, are primarily the result of the managers’ individual stock picks. Still, valuations for these stocks “are really inexpensive,” and “prospects for these companies are better than for any other part of the market that we see,” she says.

Another tech stock, Teradyne Inc (TER), was the fund’s No. 1 holding on June 30. The company is a leading supplier of automatic test equipment used in producing semiconductors. Its attributes include a 20% growth rate and a solid balance sheet, according to Suvall. She also envisions semiconductor-related stocks to gain as companies increase spending on information technology, which they ignored between 200 and 2003. Because capital expenditures in the area appear to be rising, “we continue to believe that the upturn in the semiconductor equipment area is only in the beginning stages,” Suvall says.

A favorite of Suvall’s among the fund’s technology investments is chip maker Cypress Semiconductor (CY). The company features a sound balance sheet and its stock is “very cheap on a valuation basis,” she says. Suvall points out, too, that during the technology slowdown earlier in the decade, Cypress was able to cut expenses and able to diversity its product line through acquisitions it was able to make inexpensively.

TCW Galileo Value Opportunities has been a strong performer in up and down markets versus its peers, but its relatively concentrated portfolio — the fund owns 50 to 60 stocks — means it can also be more volatile that the average mid-cap value fund. However, given that the managers delve into busted growth stocks, turnarounds, and less traditional value sectors such as technology, one could also expect this fund to pack more punch than its mid-cap value fund peers.

Contact Robert F. Keane with questions or comments at: [email protected].