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A Fund That Prospers From Cheap, Small Companies

The managers of Skyline Special Equities fund look for value but want growth, too.

Finding undervalued gems among the thousands of publicly traded small-company stocks is the mission of Skyline Special Equities (symbol SKSEX). Over the past year, the fund’s managers have found diamonds in stocks tied to the housing recovery, a boost in consumer spending and an improving industrial sector.

One big winner was Caesarstone (CSTE), an Israeli maker of quartz countertops. Its stock has soared 110% since Skyline bought it in January. Also helping to boost the fund’s results were Winnebago Industries (WGO), a maker of recreational vehicles, and trucking company Swift Transportation (SWFT). Both stocks have doubled over the past year.

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William Fiedler, Michael Maloney and Mark Odegard, who have run Special Equities since 2001, seek undervalued companies with market values of $2.5 billion or less. To ensure cheapness, they buy only if a stock’s price-earnings ratio is at least 20% less than the P/E of the small-company Russell 2000 index. Even then, they’ll invest only if they believe a company can deliver earnings growth regardless of the economic environment. “That helps us avoid value traps,” says Maloney. He and his co-managers establish a price target for every stock they buy, and they sell when a stock reaches that level.

Special Equities holds about six dozen U.S.-traded companies, including a handful based overseas. The fund has a turnover ratio of 47%, suggesting that it holds each stock for an average of two years.

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