Scavenger hunt.

Dawn Alston Paige of Loomis Sayles looks for undervalued mid-caps

It's Dawn Alston Paige's job to conduct a daily stock market scavenger hunt. Instead of buying shares in the Microsofts or Pfizers that have blazed in the market, her fund, the Loomis Sayles Midcap Value Fund (800-633-3330), sticks to companies with a market cap between $1 billion and $5 billion (a figure calculated by multiplying the number of shares a company has outstanding by the share price).

As a value manager, she scrapes together recruits by identifying stocks that are cheap relative to the market. Paige's starting point in her quest for "fallen angels," which represent 20% of her portfolio, is the newspaper. "I look for companies with short-term problems that the market might have overreacted to," she says. "There are lots of companies that report weak earnings one quarter Or have a merger fall through; a lot of investors won't tolerate missteps of any kind, and you'll see the stock punished 10%, 20% or more in a hurry."

That's not to say that all has been cheery for mid-cap value managers. Investors have flocked to large cap stocks the Goliaths that are seen as sure and steady when the economy teeters. The result: the Standard & Poor's 500 index sped to a 28% gain last year while Paige's fund, although in the top third of her investment category, gained 4.12%, thanks to a hefty 18% rally in the fourth quarter.

Time should be on Paige's side. Mid-cap value investing more than holds its own against the giants. Between 1978 and 1995, mid-cap value stocks averaged a total return of 18.3%, almost 2.5% more than any large cap investment during the same period, according to Wilshire Asset Management. Paige's fund, meanwhile, has averaged a 18.67% annual total return since its inception in June 1996. "In this kind of market, you have to be patient," Paige points out. "Things have a way of turning around, as long as you hold the course."

Paige says she'll focus on stocks that trade at a minimum price-to-earnings multiple 20% lower than that of the overall stock market. These days, with the S&P 500 trading at a 27.6 multiple, that means any company hoping to catch Paige's attention will trade at 22 or lower. And she doesn't mind putting money in a company after Wall Street has ravaged shares--that is, if earnings look to hold up over the long haul.

That is what drove her to pick such stocks as Dean Foods (NYSE: DF), a dairy company; retailers Saks Fifth Avenue (NYSE: SKS) and Claire's Stores (NYSE: CLE); regional bank Union BanCal (Nasdaq: UNBC); and utility company DQE (NYSE: DQE).

Paige's Mid-cap Value Posse

                                                  Est. 5-Yr.
                                                  Annual EPS
Company             Exchange: Symbol   Current      Growth     P/E
                                       Price(*)
Dean Foods          NYSE: DF            $37.50      12.5       14.9
Saks Fifth Avenue   NYSE: SKS            28.94      20.7       18.9
Claire's Stores     NYSE: CLE            27.00      17.3       19.7
Union BanCal        Nasdaq: UNBC         33.81      10.1       14.0
DQE                 NYSE: DQE            39.75       4.3       15.7

                      Why Stock Will Outperform

Dean Foods          * The producer of dairy products will benefit
                      from a decrease in dairy prices, improving its
                      margins and driving earnings growth
                    * Low P/E relative to the market and dividend
                      yield of 2.6%
Saks Fifth Avenue   * Will begin to see synergistic benefits of
                      last year's merger with retailer Proffitt's
                    * Low P/E and expected average earnings growth
                      rate of 25% over the next two years
Claire's Stores     * Mall-based jewelry retailer pierces over 2
                      million ears--more than any other company
                      around
                    * 1,700 outlets focused on burgeoning teen
                      market
                    * A bargain at its current P/E
Union BanCal        * Third largest bank in California is in the
                      midst of a turnaround
                    * Has strong regional franchise in the Golden
                      State and the Pacific Northwest
                    * Improving management of capital and expenses
DQE                 * Divestiture of electric generating plants
                      will give company a load of cash
                    * Stock buyback program or acquisition will
                      boost share price
                    * Offers investors a 4% yield

(*) As of 3/16/99

Source: Zacks Investment Research, Dawn Alston Paige3