High hopes for small stocks

0 Comments | Milwaukee Journal, The, Apr 2, 1995 | by Kathleen Gallagher

Ziegler also likes companies with stock prices that she believes don't fully reflect the value of their underlying businesses. She tries to buy those stocks when she sees catalysts that will propel the stock price higher.

For example, Ziegler foresees a catalyst for Puritan-Bennett Corp., a leader in respiratory therapy that makes and sells home respiratory equipment and hospital ventilators. Last fall, Puritan-Bennett's board of directors rejected an unsolicited takeover offer for $24.50 a share. Angry shareholders are threatening a proxy fight at the annual meeting in June, so management is cutting costs and reducing discretionary spending to prove to investors that rejecting the offer was the right thing to do, Ziegler said.

She calculates Puritan-Bennett's private market value at about $32 a share and believes earnings growth is accelerating because of management's cost- cutting moves. Ziegler thinks the company should be able to earn $2 a share, compared with $1.35 a share in 1994.

"At $23.62 1/2 a share, the company is cheap, based on this year's earnings if they make $2 a share," Ziegler said. She is buying this stock for Artisan Small Cap.

Ziegler expects Artisan Small Cap to have a lower percentage of cash and foreign stocks than her Strong funds did. At Strong, international stock portfolio manager Anthony Cragg makes stock recommendations for the foreign stocks in all funds.

Ziegler also said Artisan probably would hold more Leg 3 ends here small-company stocks than her Strong funds did because it will never get as big.

"Carlene might have a small advantage because she'll cap her fund at $300 million," Chin said. She also has the advantage of being a known quantity in the mutual fund world, he said.

Chin likes managers to have at least three years of quantifiable results behind them.

"Carlene has a background we can be comfortable with," he said.

Still, Ziegler has always managed her funds while working for big firms with large research staffs. Front and Lipper both think another question involves how well she will do in a small organization.

"There's a great difference between being a good fund manager and a good researcher," Lipper said. He believes stock researchers often are better at judging when stock prices warrant further consideration.

Lipper also thinks researchers are good at digging up stocks beyond the fund manager's favorites. Ziegler will buy 25 to 30 stocks for the Artisan fund initially, and work up to between 50 and 70, she said.

"It's easy to have six or seven securities you like, but the rest those are the ones that can come back to haunt you," Lipper said. "There's also always the chance some of your favorites will turn on you."

Don Phillips, publisher of Morningstar Mutual Funds in Chicago, thinks technological advances have diminished the difference between large and small firms.

Ziegler will have access to all the outside research she did at Strong and SteinRoe because Artisan is subscribing to data feeds that provide it, she said. Also, she has hired Millie Adams Hurwitz, former co-manager of the SteinRoe Prime Equities Fund, as a research analyst.