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'Stupidly cheap' companies can be wise buys


Dirk van Dijk loves the unloved.

An equity strategist at Dean Investments in Dayton, Ohio, van Dijk and the firm's investment managers favor down-and-dirty businesses, such as wallboard makers, truck manufacturers, mobile home builders, oil drillers, even gravel operators.

Many of these stocks are "stupidly cheap," van Dijk - pronounced "van dike" - says. But they are solid, money-making businesses that have largely been forgotten by investors.

The strategy of buying these stocks is paying off after two rocky years. The Dean Small Cap Value Fund is up 12.99 percent this year, which is well ahead of not only the flagging major indexes but also its benchmark, the Russell 2000 index, which is up 6.13 percent. And the Dean Large Cap Value Fund is up 5.48 percent this year.

The funds suffered in 1998 and 1999 during "18 months of hell," he says, as money streamed into technology and Internet stocks, and out of the blue-light specials.

"It was ugly," van Dijk says.

But this year, the performance has been strong, and the funds are being driven by a jumble of gritty companies such as Paccar Inc., which makes trucks under the Kenworth and Peterbilt nameplates. "It's a great company that has not lost money since FDR was trying to pack the Supreme Court," van Dijk says.

It is also cheap, trading at $42 a share, which is seven times its earnings per share price, far less than the price-to-earnings ratio of the S&P; 500 companies, which trade at 27 times earnings. "You are talking about a massive discount," van Dijk says.

The discount is partly owed to the fact that orders for big rigs have fallen, but a pickup could ignite the stock, he says. "When that starts, it is off to the races."

Vulcan Materials Co. is another holding. The company, which sells construction materials, including crushed rock, is a steady grower and trades at $43 a share, or 18 times earnings per share. Van Dijk expects solid earnings growth during the next several years, because Congress approved increases in road improvements, and competition isn't overwhelming.

"I don't think anyone is going to be selling rocks over the Internet," van Dijk says. "You are not going to e-rock if you want to pave the road. You are not going to come up with a lower-cost solution."

Albertsons Inc., a big grocery store company, is another favorite, though it has had problems digesting its acquisition of American Stores Co. The stock trades in the $21 range at 10 times earnings per share. "For the second-largest food retailer in the country ... that just seems too bloody cheap," he says. "Eventually, they are going to get their act together."

Van Dijk and a team of investment experts at Dean look for companies that trade at rock bottom prices in relationship to their book value - what the company owes minus what it owns - and earnings.

Bottom fishing has been the firm's philosophy for years, but buying cheap is also part of van Dijk's personality. "I drive a 3-year-old Ford Escort station wagon," says van Dijk, 41. "I'm into functionality. Regardless of how much money I make, I don't think I will ever drive a Lexus."

While van Dijk likes companies that are inexpensive and have growth potential, his logic for buying them is even simpler. He likes TJX Cos., the parent of T.J. Maxx and Marshall's, because they are "pretty good operators."

But there is another reason. "Ever met a teenaged girl?" he asks. "They want to go shopping. They don't need the clothes, they just need to go shopping."

Oil companies and homebuilders are other favorites, because surviving without either would make life difficult.

He is high on a company called Tidewater Inc., which owns ships that tow supplies to oil rigs. "These are not little skiffs, they are 180-foot-long ships, and Tidewater has about 600 of them, which is more than the U.S. Navy has ships," he says.

Van Dijk is on the prowl for more unloved companies.

"It looks like the telecom sector got slammed again," he says. "That is an area that I am becoming intrigued with."

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