Trouble for some means profits for others

Because the herd mentality often prevails on Wall Street, some of the best growth companies can be trampled in a stampede.

As a result, money managers looking opposite the direction the crowd is looking can sometimes see opportunities where others see trouble.


Dutch Handke, who runs the $70 million Alliance Counterpoint Fund, tries to pick up some of these stocks under pressure.

"I try to buy growth stocks that are out of favor," the 43-year-old money manager said.


His strategy has generated a total return of 10.76 percent for the 12-month period that ended Sept. 30, according to Lipper Analytical Services, a mutual-fund rating service in New York.

Some of his recent picks include Abbott Laboratories, Morgan Stanley, Corning, Federal National Mortgage Association and British Petroleum.

Mr. Handke says he's not picking up every down-and-out stock. "I'm not playing around with bankruptcy candidates," he said.

"This 'contrarian' fund never invests in severely downtrodden stocks or detested industries," wrote Amy Arnott, an analyst with Morningstar Inc., a mutual fund rating service in Chicago. "The key is to exploit the market's tendency to overreact to short-term problems."

Corning, for instance, was added to the portfolio after trouble over silicone breast implants arose earlier this year. Corning owns a 50 percent stake in Dow-Corning, which produced silicone breast implants.

"We took advantage of what we determined was investor overreaction to the potential liabilities resulting from this product's recall," Mr. Handke told shareholders in the fund's semiannual report.

Mr. Handke also picked up Intel after its share price came under pressure recently.

Mr. Handke, whose office is in Cleveland, says his distance from Wall Street has its advantages. "I don't think it hurts, especially when you want to take a long-term view."


His long-term outlook is apparent with his stake in Philip Morris, which he has held almost since the fund's inception in February 1985. Over the years, the value of his Philip Morris holdings has grown to about $3.5 million, or 5 percent, of the fund's assets.

Mr. Handke notes that his strategy of holding onto winners also helps fund shareholders, who otherwise would have to pay taxes on capital gains the fund would realize by selling strong performers.

Mutual funds are not taxed on their dividends and capital gains, because they pass this income on to shareholders, who are responsible for the taxes.

Mr. Handke says he will sell a stock if the company's fundamental strengths deteriorate, if he wants to raise money for more attractive investments or if a holding is acquired.

So what does Mr. Handke advise individual investors?

"Look for good, solid growth companies that make products you know and like," he says. "Buy 'em and put them away."