What's the focus of your fund?

Our orientation is GARP growth at a reasonable price. I strongly believe, and in fact Warren Buffett said this, that in a $4 trillion economy if you can't find something that's a reasonable price to buy you're not doing your job as a money manager. So we wake up everyday searching for something that is inefficiently priced, and when we find it we'll buy it.

Why the mix of asset classes?

Most of inefficiency in the market occurs with the small- and mid-cap sector, so that's where our emphasis is. About 30% of the portfolio is large caps. I want to balance portfolio risk and liquidity so I don't have all my eggs in one basket. You get your biggest bang for the buck with small companies, but all-cap diversification offers better risk control. If you put all your money in small cap and you have a down market, you're going to be really bruised, even if you're as careful as we are about what prices we pay for things. In addition, you can find some inefficiently priced bigger companies that you're ahead of the curve on and they have better liquidity. We bought Home Depot (HD) when it was out of favor, at $22 a share, and it's now $35. We bought JC Penney (JCP) at $18 not too long ago, and it's actually up 60%, at $33 today.

Do you diversify in terms of your position total, too?

Yes. The portfolio tends to be diversified. Our average position is between 1% and 3%, and 35-50 stocks is the range in the portfolio.

Why long-only?

Our strong suit is the long side, not the short side, so you do what you do best.

What do you look for in these companies?

We're looking for companies that sell for relatively low price to sales, have good balance sheets, and have good businesses that we understand. We're looking at growth where we're not paying some kind of premium for it. We have a mental criteria that we have at least 50% upside in the company over a 12-18 month period. We also like to see insider buying as much as possible. It's not iron clad, but the majority of the companies have large insider ownership and are at prices where the people who own them aren't about to run out and sell.

Our whole thesis is to get into something relatively early, buy it at a low price ratio to earnings and/or cash flow. We prefer to have companies with lots of free cash flow, and also companies where top line is growing.

What are some companies you own with the best prospects over the next 3-6 months?

In the micro-cap area, we're the second largest owner of a company called World Health (WHAI). It's a roll-up in the nurse and medical staffing business. They are acquiring other similar companies around the country. Revenues will probably come in at $12 million when the totals for 2003 are reported and this year revenues are expected in the neighborhood of $60 million. If they close about 50% of the possibly acquisitions they have on the plate, the company's market cap, which is $36 million, is about half of expected revenues, and that can be a conservative number.

At that rate, because of its high margins (the company has 19% pre-tax margins, which is another good criteria) and enough finances to get there (with about $7 million in available cash), the company will earn approximately 25-30 cents a share. We started buying the stock at 80 cents and it's now $1.60, and I think we're only in round one of the evolution of the fundamentals of the company. The guy who runs it, Richard McDonald, previously with Robert Half, is someone we have spent hours with both on the phone and in person, and have a strong belief in his ability to execute. His objective is to take this to a $250 million company in the next 2-3 years. We believe the company will trade between $20 and $30 a share when he gets to his goal.

Any other companies you'd like to mention?

Let me give you a bigger-cap company, Hanger Orthopedic Group (HGR) on the New York Stock Exchange. This is the dominant company in the orthopedic equipment retail area. They have 25% market share. It's a business which is growing, leveraging on the aging of America. The company is selling at a discount to its 25% bottom line growth rate. They're expected to earn about $1.30 this year and the stock is at $16-17.

Hanger dominates all but two urban markets in the U.S, and their nearest competitor has 2% market share. By virtue of that they get better value in terms of purchasing power, like Wal-Mart, so that helps their margins a lot and it's very under-covered by Wall Street.

You seem to like healthcare.

Yes, if we picked a group of companies, the only exception to our GARP practice would be gold stocks and healthcare. One of the areas I think is impervious to economic cycles would be the medical area. Some names we hold in addition to World Health and Hanger are Crucell (CRXL), deCODE genetics (DCGN), Lifeline Systems (LIFE), Penwest Pharmaceuticals (PPCO), and Vasogen (VSGN), which I think it one of the best stocks in the portfolio.

One we don't still hold but was a beautiful stock is Nabi Biopharmaceuticals (NABI), which we bought at around $6 -- at about $2 above cash -- and is now around $16. We don't own it only because it's gone up so much.

Do you trade stocks or mostly hold for the long term?

It varies. Half of our portfolio is what I'd call tradable in other words, I have a specific goal in mind for something. Like Matria Healthcare (MATR), which is an example used in our brochure. Selling at about 5x free cash flow, it was $9, and I thought, Ok, it has an easy 50% upside, and actually we sold it up 80-90% after about three months.

What do you like outside of healthcare?

One is Magna Entertainment (MECA), a $540 million market cap company trading at $5.48 with a book value of $7.00 plus. It's the largest race track operator in the U.S., and on the front end of major improvements in cash flow due to pending approval by several states to use Magna's facilities for slot machines. Oklahoma recently approved slots, and the split there is 46% to Oklahoma and 54% to Magna.

Another is Lions Gate Entertainment (LGF), which is the largest independent movie company in America. Although it has recently doubled, it is still selling at a reasonable price to free cash flow, which is 9x free cash flow, and cash flow is growing at 25% a year.

What's your view of the market in the coming 3-6 months?

I don't like the stock market at this juncture because I think it's gone up on a parabolic rise since the first quarter of last year without any meaningful correction. Plus, the valuations of most companies, particularly large companies and the majority of technology companies, are out of whack based on reality. So I am, shall I say, a closet bear on the market in general, and I might add we also rarely invest in technology for two reasons: It takes too much time -- you can't understand what you own -- and for the moment it is way overpriced. If we were running a hedge fund I would probably short some of the technology companies and QQQs.

That's the way I feel at this precise moment. This is a little bit out of our normal situation, but because of market conditions we have a small number of growth gold companies in the portfolio. That helps a little bit. That's a defensive move just based on these companies and the dollar. And we are in about 40% short-term, high-yield fixed income, of three years or less. Right now we're in a somewhat defensive mode and have basically sold all the large-cap companies we own.

I think an investor should be cautious now, and, more important than anything else, be very careful what price you're paying for a company's stock.