B.E. black fund watch: was breaking up hard to do?

Now that Randall Eley is gone; it's Eugene Profit's turn to run things

Here's a case where investing well is the best revenge. When last we checked into Eugene Profit's mutual fund operation (see "A Fund Manager is Born," April 1997), the former defensive back was busy marketing his services to every church meeting and investing group gathering he could attend. Then, late last October, his all-star money manager, Randall Eley, resigned from the Profit Lomax Value Fund to launch his own. Both Eley and Profit characterize the parting as cordial, although it's not surprising to hear that the latter was somewhat taken aback. "We were a little disappointed, but we had to go on," says Profit.

Despite a few investors who panicked and pulled out, Profit went on to lure enough new money to boost his asset base (the amount of money the fund has collected from clients) 33%, from $1.8 million to $2.4 million. His results haven't suffered much, either. From the time he took over the reins to the end of April of this year, the Profit Value Fund has returned investors over 13%. The total return from the beginning of 1998 to the end of April has been 11.27%, enough to edge out Randall Eley's new fund, the Edgar Lomax Value Fund, which posted a 9.65% total return as of April 30.

So, what's different after the breakup? Profit will tell you that at its core, his take on running the fund is essentially the same as Eley's: he's a value manager by heart, one who wants his stocks at a cheap price and ready to go. Where Profit and Eley part ways, no pun intended, is on their application of value-investing principles, that is, buying stocks with low price-to-earnings (P/E) multiples, low price-to-book values and little debt. Profit says that where Eley tends to be absolute--a stock must be cheap compared to the entire market--he tends to apply criteria on a relative basis. In other words, if the market is selling at an average P/E of 22, Profit's willing to eyeball a company that is fetching a 35, provided the figure is less than comparable figures for its industry peers.

Needless to say, that has made for a fair amount of portfolio shuffling and a few newcomers to Profit's portfolio. "I've brought in a lot of technology, pharmaceutical and biotech names Randall probably wouldn't have held," says Profit. "My thinking is you have to have exposure, because we're talking about industries that are growing so quickly." And as a result, names like Compaq and EMC are now large positions among the 36 stocks Profit holds.

Profit likes EMC Corp. (NYSE: EMC), a well-established name in data storage hardware for computer systems, Even though the stock was up 60% for the first four months of the year, Profit sees EMC headed still higher. His reason: the company's return on equity is 28%, near a five-year low, despite indications that the business is strong. Meanwhile, Compaq (NYSE: CPQ), another computer favorite, seems like a steal, despite the fact that cheap personal computers and Asia's currency crisis made for a disappointing first quarter. Profit says those concerns are behind the company, and with competitors like Dell and Gateway rallying all year long, it's Compaq's turn to shine.

Another stock Profit's keen on is Bear Stearns (NYSE: BSQ. The brokerage firm now sells at a P/E of 12.2, compared to the 17.7 a peer like Merrill Lynch now fetches.

PROFIT'S PROFITS

This money manager looks for value stocks--cheap, but with promise

Name: Profit Value Fund Manager: Eugene Profit Phone: [phone] Sales Charge: None Minumum initial investment: $2,500 ($1,000 for IRAs)

TOP FIVE HOLDINGS

Company                  Exchange:   Current    Type of
                         Symbol      Price(*)   Business

Wal-Mart                 NYSE: WMT   $56.50     Retail
American General Corp.   NYSE: AGS    67.69     Insurance
EMC Corp.                NYSE: EMC    40.38     Computer hardware
Compaq                   NYSE: CPQ    26.81     Computers
Harris Corp.             NYSE: HRS    48.19     Electronics

(*) As of 6/1/98