Value Fund

Will Nasgovitz is finding plenty of beaten-down large-cap companies these days with strong prospects for growth. Along with his colleagues, the co-manager at Heartland Select Value Fund (HRSVX) says he's mindful that stocks with falling prices often keep dropping. "You can have a cheap stock but with inferior product lines or low research and design budgets relative to other companies," Nasgovitz said. "So we also look for a recognizable catalyst that could cause its stock price to appreciate."

Many larger-cap companies bruised and left for dead by investors in the bear market years are climbing back, he says. And not all of those improvements in business operations have been noticed by investors, Nasgovitz added. "We've been finding a lot more undervalued larger-cap stocks," he said. "We keep the portfolio vary concentrated, between 40-60 stocks," Nasgovitz said. "They're our best ideas, representing a collaboration of four managers and eight analysts."

2006 was a difficult year for Ron Muhlenkamp. Although his expectations on the economy were reasonably accurate (a soft landing), his expectations for the performance of some of our stocks were not. Specifically, he did not anticipate the degree and rapidity in which orders for new homes evaporated and the backlogs of homebuilders shrank. Muhlenkamp also did not anticipate the repeat of unusually warm winter weather, causing the price of natural gas to fall dramatically. Muhlenkamp has been encouraged by the action of the management of his companies. As their businesses slowed, they’ve used the resulting cash flows to buy in stock.

Looking through the 3D glasses of the style box, you think it would be easy categorize a fund like Janus Mid Cap Value. It must be a fund that buys the stocks of midsize companies that its managers deem to be undervalued. While most of its portfolio does hew to this predetermined approach, the description does not reflect exactly what stocks managers Tom Perkins and Jeff Kautz prefer at the moment. "I don’t like being put in a box too much," says Perkins, who has managed the fund since its 1998 start. "I try to run the fund as flexible as possible with in the limits of the prospectus." The prospectus requires that 80% of the stocks they buy carry market capitalizations of between $700 million to $17 billion.

But recently, the duo have found that the preponderance of bargains are among stocks of large companies. Because small caps and mid caps have beaten large-capitalization stocks for seven straight years, it is more difficult for Perkins and Kautz to find bargains in their usual stomping grounds. Last year, for example, they invested in Coca-Cola (symbol KO), hardly a stock you’d expect to find in a mid-cap fund. A review of the fund’s 2006 performance finds stocks of large companies contributed mightily. Among big large-company gainers last year were AllianceBernstein (AB), Berkshire Hathaway (BRK), Marathon Oil (MRO), Norfolk Southern (NSC), Waste Management (WMI), Deere (DE) and CVS (CVS).

Wall Street's darling is back: Goldilocks, whose economy is neither too hot nor too cold, but just right for optimistic investors. Inflation is under control, earnings are still strong, the outlook is for solid growth. That's why we're in the second-longest rally since 1929, at four years, three months and counting. Since July 2006 in particular stocks have rocked.

Investors Intelligence, which polls Street sentiment, reported recently that 60% felt bullish and were convinced the economy is just right. The run has lulled investors into a false sense of security. After all, Goldilocks was no saint. She broke into someone else's cottage, stole their porridge and busted Baby Bear's chair. As a contrarian, I have always related better to the bears. They are the ones who recognized something was not quite right. That is how I feel as we start the new year.

A correction is inevitable. I'm anticipating at least a 10% market drop sometime this year. Why? Earnings expectations are overly optimistic. After increasing 20% in 2005 and 15% last year, Wall Street is still banking on 10% earnings growth for 2007, double the historical average. But economic expansion is projected to slow to 2.5% in 2007, down from 3.3% in 2006. The smart money knows it is not possible for corporate profits to outpace the underlying economy for very long.

The usual "we-beat-the-markets-again" party was missing this year from Bill Miller's calendar. But the mutual-fund manager -- whose $19.4 billion-in-assets Legg Mason Value Trust fund finally failed to beat the Standard & Poor's 500-stock index last year, ending a 15-year streak -- says he is more optimistic now about U.S. shares than he has been in the past two years.

"The stock market is still cheap," Mr. Miller says. Mr. Miller argues that the stock market, especially large companies, is worth about 20% more than its current trading levels. The market and the economy appear to be firing on all cylinders, he says: Corporate earnings are strong, interest rates are steady, merger-and-acquisition activity is booming, and commodities prices are falling from overheated levels.

Not everybody had a great 2006. Ron Muhlenkamp -- and shareholders in his Muhlenkamp fund (MUHLX) -- are nursing wounds. The fund returned a miserly 4% -- 12 percentage points less than Standard & Poor's 500-stock index. The performance was bad enough to put Muhlenkamp in the bottom 1% among all value funds.

Put some money in this loser. Like every first-rate manager, Muhlenkamp has a bad year once in a while. Just ask Bill Miller, whose streak of beating the S&P ended at 15 years in 2006 when his Legg Mason Value Trust returned just 6%.

When bad years happen to good managers, it's often time to add money to their funds. They may not bounce back immediately, but so long as their investment strategies remain sound and their funds haven't become bloated with assets, bounce back they will -- and you'll be glad you signed on for the ride.

Bill Miller recently stated in an interview that he's so bullish for 2007 that this is the first year since 2002 that he is starting to use leverage to buy stocks. Here's what Altucher believes are the best stocks he's got going right now.