Hot on the case.

If there's anything remotely close to a thankless investing job in a year when the market has rocketed into orbit, it'd be that of a value portfolio manager. Imagine having to look for undervalued stocks late this summer, when the S&P 500 ballooned to historic highs.

It's a year when the pickings have slimmed, says Eric McKissack, portfolio manager of the Ariel Growth fund. "It's not easy right now," McKissack says, "and to be truthful, we've got to be that much more diligent when examining new ideas because often enough you'll find that the rally has bypassed either really bad companies or ones that have worn out investors' patience."

As a value manager, McKissack is among the sleuths on the lookout for cheap stocks with a twist that most everyone has overlooked--provided they have all the makings of a good three- to five-year holding. Add another wrinkle to his strategy: McKissack focuses on mid-cap stocks, concentrating most of his hunting on companies with a capitalization of $200 million to $5 billion. Studies by experts at Prudential Securities, among others, have shown that mid-cap stocks as a group seem to combine the steady, low volatility price movement of the market's better-known large-cap or blue-chip corporations with the price gains of peppy small company stocks.

So far, those studies have, by and large, held up. While the S&P 500 had soared 25% by early August, McKissack's fund was up 18%--a full two percentage points above the S&P midcap 400, which managers who share the same investment style reference as a benchmark. The credo at Ariel has been to keep expenses low--Ariel Growth for instance has a 1.3% expense ratio, a tally of the percentage of overall assets eaten up by the costs of doing business. That's compared with around 1.5% for the average fund. One way to cap costs, McKissack says, is to keep turnover (or selling one company and buying another) down to a minimum. Ariel Growth switches out of 20%-30% of its portfolio annually, compared with 60% for the average- small- or mid-cap fund.

Whether or not the market is overvalued, McKissack has stuck to basic criteria when looking for stocks. First, he's keen that his investments sell at a discount to the overall stock market P/E ratio. Another way he gets an edge on the competition is to look for shares that aren't widely followed by the big Wall Street brokerages. Equity analysts are gossips; once one finds out something juicy about a company, the news is soon all over the stock market.

McKissack is careful in choosing new investments now because of what he sees ahead for the market. "We'd have to say we're cautious in the current environment," he says. "I think we're in for a slowdown in earnings growth, and we could see a correction." There are mitigating factors, however. McKissack says baby boomer retirement funds and money that foreign investors are channeling into the stock market could well keep any downturn brief.

That said, McKissack feels he's landed upon a few gems. First is Allergan (NYSE: AGN), a pharmaceutical company specializing in contact lens solutions and ophthalmic drugs to treat glaucoma. McKissack says the company (trading at a P/E ratio of 21.85 as of this writing compared with 19 for the S&P 500) has gone overlooked during a time when it was restocking its product pipeline and getting approval for new products. McKissack sees Allergan earning $1.80 this year and $2.05 next year, versus $2 in 1996, and he thinks it could rise to the high $40s in the next three years.

Hasbro (AMEX: HAS), a leading toy manufacturer, has also piqued McKissack's interest. "Hasbro's been known as a boys' toymaker, and the company stands to profit from movies like Star Wars, Barman and Hercules." McKissack thinks Hasbro can generate earnings of $1.80 a share in 1997 and $2.05 next year, while the stock should rise to $43 in the next three years.

Lee Enterprises (NYSE: LEE), which owns broadcast properties in places like Honolulu and operates newspapers in small- and medium-size cities, is one of McKissack's favorites but it hasn't gotten a lot of attention. "It's a good time for a small media player like Lee," McKissack says. "The price of newsprint is down, and a change in government rules on the ownership of broadcasting companies has raised stock prices industry-wide." The Ariel manages sees earnings of $1.40 in 1997 and $1.60 next year, and thinks the stock could attain a price of $43 in the next three years.

McKissack also likes Safety-Kleen (NYSE: SK), an environmental waste company that washes machinery used by auto mechanics and the grimier industries around. Afterward, the company recycles the oil it collects, which it in turn markets. He sees earnings rising from $1.03 for fiscal 1997 to $1.20 next year, helping to push Safety-Kleen stock from a current price of $19.50 to $30 in three years.

Finally, McKissack says Century Telephone Enterprises (NYSE: CTL), which provides local telephone service in rural areas, looks good, especially since its cellular business continues to grow at a rapid rate. He thinks earnings will grow from $2.40 in 1997 to $2.70 next year, while the stock may well rise from a current level of $36.75 to $55. --James A. Anderson

RELATED ARTICLE: WISE WORDS

As the year winds down and you consider investment moves either now or for early 1998, MERRILL LYNCH FINANCIAL CONSULTANT NORMAN N. FORRESTER (800-937-0843) says one tried and true strategy that has come up a winner again and again is buying stock in the "dogs of the Dow." The unseemly name, one that's commonly used around Wall Street, refers to the 10 stocks in the Dow Jones Industrial Average with the highest yields at year's end. More often than not, the shares of those 10 companies have been beaten up during the previous year, hence pushing the yield or percentage of their dividends to the company's overall stock price up. Forrester says the market has always favored large caps over the long term and that investors eventually come back to even the Dow's ugliest mutts. That way, you can get into a solid blue-chip stock even after a major rally by that segment of the market, and still stand to make healthy gains. Case in point: Contenders at the beginning of this year, Caterpillar and General Electric have gained 54% and 27%, respectively, as of 8/31/97.

McKissack's Picks

Company             Exchange: Symbol   Stock PRice[*]   P/E

Allergan            NYS: AGN           $30.81           21.85
Hasbro              AMEX: HAS          $28.56           17.96
Lee Enterprises     NYSE: LEE          $25.50           19.32
Safety-Kleen        NYSE: SK           $19.50           19.12
Century Telephone   NYSE: CTL          $36.75           12.13

[*] As of 8/18/97