Quick Take: To gain entry to the Pax World Growth Fund (PXWGX) companies must first pass a number of social and environmental screens.

Those that make it over the first set of hurdles then have to show portfolio manager Paul Gulden that they can increase earnings and sales by 20% or more per year, and sustain that growth rate. Where finances are concerned, Gulden also looks for low debt and strong cash flow. He likes to buy stocks at prices he deems reasonable.

Lately, Gulden has found attractive investments among energy and related stocks. Even if currently high oil prices pull back to the mid-to-low $30s, drillers and explorers “should be able to make a heck of a lot of money,” he says.

Gulden’s $63-million fund gained 12.1% through October this year, topping all of its all-cap growth fund peers, which rose 0.7%. For the three-year period ended in October, the Pax World fund returned 7%, versus a gain of 3.7% for its peers. The portfolio was recently upgraded to 4 Stars from 3 Stars by Standard & Poor’s.

The Full Interview:

The Pax World Growth Fund can’t buy companies that pollute or otherwise hurt the environment, so finding energy stocks can be difficult, says portfolio manager Paul Gulden.

Still, he’s found enough acceptable stocks in the sector that they account for about 10% of the fund’s holdings. Gulden has been drawn to these businesses lately because they stand to benefit from high oil prices.

One energy-related stock that successfully passed through the fund’s environmental screens is Chicago Bridge & Iron N.V. (CBI), which Gulden began buying within the last couple of months. The company, according to Gulden, is the leading designer and builder of terminals that store and process liquefied natural gas, a fuel that he says is becoming increasingly popular.

Chicago Bridge’s growth rate has been “somewhat spotty,” Gulden concedes. But he believes it will “accelerate quite dramatically” as more energy producers become interested in liquefied natural gas. The company should also get a boost from some large contracts it signed not long ago, Gulden says.

Elsewhere in the energy sector, the fund has stakes in Smith Intl (SII) and Baker Hughes Inc (BHI), which provide products and services to oil and natural gas companies; Apache Corp (APA), which drills for oil and natural gas; and Chesapeake Energy (CHK), a natural gas producer.

In addition, Gulden owns shares of Carbo Ceramics (CRR), which makes ceramic beads that are pumped into fractures in rock to make oil and natural gas flow more freely, thus increasing the productivity of wells.

Other companies excluded from the fund include those involved with firearms, defense, nuclear power, tobacco, liquor or gambling. Like other funds in the Pax World family, it also considers a company’s hiring practices and labor relations, and shuns those with poor histories in either area.

After companies have shown that they meet Pax World’s non-financial requirements, Gulden searches for those that are increasing earnings and sales by more than 20% per year and that he thinks can sustain that pace. He wants to buy these stocks when they’re trading at a discount to the company’s growth rate.

Gulden prefers companies with leading or large market shares, strong cash flow and little debt. Companies that analysts increase earnings estimates for are on his wish list, too. About 35 stocks make their way into the fund.

Among the fund’s top holdings, Gulden cites America Movil`L`ADS (AMX) as a favorite. The company, which ranked fourth in the portfolio at the end of October, is the largest provider of wireless telecommunications services in Latin America, and one of the 10 largest in the world. Gulden says that since the industry is still in its infancy in South America the company should be able to fatten its profits in coming years.

Another company Gulden likes is Pentair, Inc (PNR), which makes pools as well as products for storing, moving and treating water. The water industry is expanding and Pentair “will be one of the major participants in it,” Gulden says. He expects its earnings to rise 27% this year and to jump another 50% in 2005. Pentair was the fund’s ninth largest holding on Oct. 31.

The fund’s No. 1 stock at that time was Urban Outfitters (URBN), a clothing store chain that Gulden describes as a “super specialty retailer.” While Gulden appreciates the company’s history of increasing profits by about 35%, he says he’s considering paring down his position in the stock, in part because he’s worried that consumer spending may decrease next year. More immediately, he doesn’t want the stock to take up too much room in fund. It now represents nearly 6% of Pax World Growth’s assets, Gulden says.

Urban Outfitters has been one of his strongest performers this year, as has software maker Autodesk, Inc (ADSK).

Technology stocks like Autodesk make up nearly 20% of the fund’s holdings. In this area, Gulden says he favors companies that provide specialty products and services because he sees them as better poised to prosper than big conventional manufacturers.

As examples of the tech stocks he leans towards, Gulden names Cognizant Tech Solutions`A` (CTSH), a provider of software maintenance services, and Websense Inc (WBSN), which offers computer programs that let companies monitor and manage employees’ Internet usage.

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