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Find Opportunity Amid Crisis with This Kiplinger 25 Fund

The manager of T. Rowe Price Small-Cap Value picks up unfairly crushed stocks and sticks with old favorites.

T. Rowe Price Small-Cap Value (symbol PRSVX), a member of the Kiplinger 25, holds stocks of about 300 companies. Preston Athey, the fund’s veteran manager, is all ears when he visits the managements of these firms, which represent a nice cross-section of the U.S. economy. He hears good news and bad news on the economic front.

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Athey has his finger on the pulse of transport—the wheels of commerce—and here the news is pretty good. The cost of shipping goods by truck continues to rise, an indication of sturdy demand (and reduced capacity). The story is similar for rail-car loadings, which are on the rise. Wal-Mart (WMT) started to ship merchandise for the Christmas season from Asia in May, two months earlier than normal, in anticipation of strong demand for container shipping capacity later in the year, says Athey.

The bad news, he says, is that corporate decision makers are dismayed by the clouds of uncertainty billowing from Washington. “As long as there is uncertainty on policy on taxes, the environment and health care, their animal spirits are pretty depressed,” he says. Corporate leaders “are not investing in machines or employees.”

Instead of spending much time attempting to read the economic tea leaves, Athey looks for areas of the market that are under stress and have been crushed by negative sentiment. He opines that 10% of the time the stock market is overvalued, as it was in 2000, and 10% of the time it is underpriced, as in March 2009. The other 80% of the time the overall market sells for close to its true value (as is the case today). The challenge then is to “lean against the wind” and identify stocks and sectors that are unfairly out of favor, Athey says.

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Two areas that he’s studying are alternative energy and for-profit education, both of which have been pounded this year. He’s also added to existing positions in oil-drilling stocks, a hated sector since the disastrous BP (BP) oil spill. For instance, he’s upped his stake in Union Drilling (UDRL), which drills only on land; in Hercules Offshore (HERO), which drills only in shallow water; and Gulf Island Fabrication (GIFI), which builds boats and platforms for offshore drilling.

But we’d be remiss if we implied that Athey is an opportunist who churns his portfolio -- quite the contrary. He holds stocks for an average of 12 years, an eternity in the fund world. For instance, Athey has held Aaron’s Inc. (AAN), his largest position, for 15 years. Aaron’s, which rents out such goods as TV sets, sofas and computers on a monthly basis, caters to lower-middle-class customers who don’t have credit cards. At the end of a rental period of, say, 24 months, the customer takes possession of the merchandise.

Athey has run Small-Cap Value since 1991 with great finesse. Over the past ten years through July 14, the fund returned an annualized 10.0%, an average of seven percentage points per year better than the Russell 2000 index, which tracks small-company stocks. Year-to-date, the fund gained 4.0%. Small-Cap Value, which charges 0.87% in annual expenses, is a fine choice for the core of the small-company portion of a portfolio.

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