Profit’s motive

Eugene Profit culls value stocks with hidden growth potential

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In the long-running contest between growth and value stocks, growth has reigned supreme for most of this 10-year bull market. But value investor Eugene A. Profit, president of Profit Investment Management in Silver Spring, Maryland, has a twist to his style.

“We refer to it as a value strategy with a growth overlay,” says Profit, who runs the $4 million Profit Value Fund (Nasdaq: PVALX, 888-335-6629), a member of the be Black Mutual Funds (“Off to the Races,” Moneywise, October 1999). “We’re trying to buy the best companies we can at the best prices.”

To accomplish that goal, Profit determines how inexpensive stocks are compared with their peers-not just the broader market-using several financial measures such as P/E ratio, price-to-book value and return on equity. If they’re at a significant discount to some, but not all, of those yardsticks, and have good fundamentals like unique products or a dominant industry presence, then he’s likely to snap them up.

This method has helped the Profit Value Fund achieve a total return of 8.8% through September 30, compared with the 5% gain for portfolios in his category, according to Chicago-based mutual fund researcher Morningstar.

Profit likes Merrill Lynch & Co. (NYSE: MER), the New York City-based financial services powerhouse. Though not usually considered a value stock, Profit says that at a P/E of roughly 12, Merrill is trading “at a significant discount to its five-year average.” In addition, the firm’s return on equity is about 14%-lower than its five-year average ROE of 21%. Despite Merrill’s commanding stature among brokerage firms and consistently robust earnings, some investors are doubtful about how competitive and effective its new online strategy will be.

Profit also has his eye on Elan (NYSE: ELN), a Dublin, Ireland, pharmaceutical firm. He’s betting that four drugs in its research and development pipeline-especially Antegren, a treatment for both multiple sclerosis and Alzheimer’s disease-could be blockbuster drugs for Elan. Also, its P/E of about 11 is attractive compared with that of other drug makers.

Profit’s last three picks are 3Com (Nasdaq: COMS), a networking systems and services provider; Tricon Global Restaurants (NYSE: YUM), the holding company for fast-food restaurant chains KFC, Pizza Hut and Taco Bell; and Safeskin (Nasdaq: SFSK), a manufacturer of disposable latex gloves. Santa Clara, California-based 3Com should benefit from demand for its new cutting-edge Palm Pilot product, the Palm VII, which provides wireless Internet access. Tricon, based in Louisville, Kentucky, makes Profit’s grade for three reasons: it’s exceeded earnings expectations; its former parent, PepsiCo (NYSE: PEP), owns more than 60% of the stock, a vote of confidence in Tricon’s long-term prospects; and at a P/E of around 11, the stock is cheaper than comparable restaurant stocks. And San Diego, California-based Safeskin has taken steps to boost its flagging earnings, such as concentrating on its core domestic base, where it enjoys market leadership, rather than expanding overseas.

Value, With a Dash of Growth

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