Quick Take: A lot of investors worry when stocks gyrate violently, but not George Schwartz. “I want to see volatility,” says the manager of the $67-million Schwartz Value Fund (RCMFX). “It creates an opportunity to buy a stock for less than it’s worth, or to sell it for more than it’s worth.”

Schwartz tries to buy shares at bargain-basement prices. He has no objection to investing in unloved companies if he’s convinced the problems that have caused them to fall out of favor on Wall Street are only transient.

In recent years, his fund has edged out its peers and the Standard & Poor’s 500 index, or stayed within hailing distance of them. Schwartz Value was up 7.7% through August this year, versus 2.4% for the average small-cap value fund, and 0.4% for the index. The Schwartz fund returned 11.8% on average for the five years ended last month. Similar funds advanced 12.8%, and the S&P 500 dropped 2.1% during that period.

The fund began operations under Schwartz in 1984, but it became available for sale in all 50 states only in 2001. Currently, the fund is more expensive to own than its peers, charging 1.89%, versus 1.53% for the average small-cap value fund.

The Full Interview:

When the rest of the market has turned its back on a company, George Schwartz is likely to approach it.

“If you buy a stock when it’s popular, by definition you’re going to be paying too high a price,” says the money manager, who oversees the Schwartz Value Fund. “You can only get a bargain if you do the opposite of what most people are doing.”

Schwartz is willing to bet on troubled businesses if he thinks their affliction is only temporary.

In picking the 70-80 stocks that go into the portfolio, Schwartz looks for those selling at a sizable discount to what he judges a company to be worth. He wants shares priced low relative to the company’s earnings, cash flow or book value. Solid balance sheets, low debt, and strong cash flow are on his check list, too.

Although he’s a value-oriented investor, Schwartz doesn’t ignore profits. “The more the better,” he replies when asked what he looks for in terms of earnings growth.

Stocks that aren’t widely followed by Wall Street are prized by Schwartz because chances are they’ll be selling for less than what they should be, he says.

Although the fund can buy companies of any size, Schwartz focuses on small and mid-sized ones. “We happen to find the best values” in those groups, he says.

Schwartz’s asset management firm, Schwartz Investment Counsel Inc., also offers the Schwartz Ave Marie group of funds, which exclude investments in certain companies based on moral criteria. But the Value Fund is not subject to those restrictions.

A company that Schwartz has bought and sold over the years, and which he invested in again this year, is Leggett & Platt (LEG), a diversified manufacturer that produces components for furniture, and automobile equipment, among other things.

Carthage, Mo.-based Leggett & Platt has a long history of paying and increasing dividends, says Schwartz. In addition, “it’s an extraordinarily well-managed company” whose accounting is “extremely conservative,” he says. The manager is wary of companies that use aggressive or questionable bookkeeping methods in an effort to spice up their quarterly results.

One of Schwartz’s favorite stocks is STERIS Corp (STE), which makes sterilization products. The shares are reasonably priced at about 15 times projected 2004 earnings, says Schwartz. He expects the company’s bottom line to increase by 12%-14% over the next several years. Steris was the fund’s fourth-largest holding at the end of the second quarter.

Another stock Schwartz likes is First Data (FDC), an electronic payment services provider that ranked third in the portfolio on June 30. The fund manager thinks the company’s earnings are likely to consistently increase by 13%-15% “for many years to come.”

The fund’s No. 1 stock at the end of June was home builder Pulte Homes (PHM). The company is attractive, Schwartz says, because it is rapidly gaining market share in an industry that he expects to grow. Since Pulte is bigger than its competitors, it can bargain down prices for building material, he adds.

Behind Pulte in the portfolio was Dollar Tree Stores (DLTR), a retailer that sells all its merchandise for $1. The chain features better management and cost controls than its rivals, Schwartz says.

The stock has been weakened recently by high gasoline prices, which hurt Dollar Tree’s primarily low-income shoppers. Wall Street fears that will undermine the company’s earnings, Schwartz says. But its profits have continued to grow, albeit slowly, he notes. When energy prices decline, as he believes they will, “the stock market’s perception of this company is going to improve again,” he says.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.