GARP Tack Wins For Wells Fargo Fund

• Paul Katzeff
• On 6:50 pm EDT, Tuesday October 27, 2009

When Ann Miletti decides how much to pay for a stock, her analysis doesn't stop at price-earnings ratios. Instead she aims to figure out what someone would pay to take over the entire enterprise.

Her team eyeballs ratios such as enterprise value (EV) to operating earnings and EV to sales. They also check out comparable buys and discounted cash flow.

And they do it all to each unit if a company owns separate businesses.

"It is a combination of art and science," said Miletti, manager of Wells Fargo Advantage Common Stock Fund (NASDAQ:STCSX - News).

"We try to buy when companies we like are trading at 55% to 60% of their private market value," she added.

To ensure that mispricing is just temporary, Miletti ducks firms that have gone fundamentally bad.

"My intent is not to find companies that will be acquired," Miletti said. "It is to find the right price to buy or sell shares. If we get lucky and a holding later is taken out, that's a bonus."

Miletti says her hunt for bargains does not make her a value manager. "We don't see value and growth as opposing styles," she said. "We are simply looking for a reasonable price for the growth rate we want."

She says her style is core or GARP, referring to the growth-at-a-reasonable-price approach.

On that tack, she has steered the $829 million portfolio to a 35.13% gain this year going into Tuesday.

Her midcap growth rivals tracked by Morningstar averaged 32.41%. The S&P 500 was up 20.49%.

Over the past 10 years her average annual return was 6.28% vs. 1.52% for her fund's peers and -0.05% for the S&P 500.

The fund began to buy Coach (NYSE:COH - News) during the first quarter. The high-end leather goods retailer is up around 60% so far this year.

Riding Coach

The fund started to buy its current stake in February as the market was heading towards its March 9 low.

"All hell was breaking lose," she said. "Many investors were afraid consumers would never go into high-end retailers again."

"Our valuation process is designed in part to take emotions out of decisions," she said. "We valued Coach at 50% of its private market value. This was a historic low. And we saw a company that always executed well and has a unique business model."

Miletti bought around 13. Now the stock trades around 33.

Capella Education (NasdaqGS:CPLA - News) was another top buy during the fund's latest disclosure period.

Education stocks have done well amid economic slumps in the past. Many workers aim to buff job skills.

Capella is up 22% this year. Why is it doing well even as the economy starts to strengthen?

"Capella is different because it focuses more on master's and doctorate programs," Miletti said. "Those programs are not as economically sensitive as lower-level programs."

The fund bought shares in March in the mid-40s. They were trading at about 55% of their private market value. The company had botched implementation of a key backroom software system, Miletti says. That jacked up company expenses.

The fund has bought and sold Tessera (NasdaqGS:TSRA - News) for about four years. The stock is up 127% this year.

The fund's stake as of its latest disclosure was only a third the size of a year earlier. Miletti says she took profits as the stock rallied.

The firm's patented processes let chipmakers cut the size of packaging around their chips. That lets manufacturers shrink the size of entire devices such as cell phones.

Miletti says 89% of Tessera's revenue comes from its intellectual property. The other 11% is from services.

Recently, the company won key patent enforcement rulings from the U.S. International Trade Commission.

"The market sees Tessera's revenue stream as safer now than it was before," Miletti said. "The company also has a number of new deals waiting to be signed."

The stock fell 7% in big volume Tuesday as the market pulled back.

Buzz up!