NEW YORK (Money Magazine) - Chris Davis should be a happy camper. His New York Venture Fund is up 16 percent this year, putting Davis Advisors' flagship fund in position to surpass the S&P 500 for the fourth consecutive year.

And when MONEY caught up with Davis in the middle of a well-earned vacation, he and his family were gearing up for a late-summer sailing excursion from Long Island to Cape Cod. Ah, the good life.

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Yet when the conversation turned from vacation spots to value stocks, Davis' mood turned decidedly gloomy. The way he sees it, investors like him have become victims of their own success. The stocks that had been grossly undervalued three years ago have steadily moved up in price.

Meanwhile, dethroned bubble stocks haven't fallen far enough to be true values. "The end result is a more rational pricing environment," Davis laments. "That makes it harder to find mispriced securities."

He's hardly the only value investor struggling to find bargains these days. Three of four leading value-oriented investors we spoke with -- Davis, Oakmark Fund's Bill Nygren and Ariel Fund's John Rogers -- expressed concern about the paucity of classic value plays. The exception: Torray Fund's Robert Torray.

Three years ago, Nygren's Oakmark fund was replete with Old Economy stalwarts like Cooper Industries, Energizer and Fort James -- companies whose single-digit P/Es reflected how far out of favor they'd fallen. "You didn't even have to believe they were deserving of a market multiple," Nygren recalls. "If you thought they could just make it to 10 times earnings, the returns could be huge."

Top picks Value experts  Pick  Chris Davis  Berkshire Hathaway  Bill Nygren  Automatic Data Processing  John Rogers  Grey Global  Bob Torray  J.P. Morgan Chase   Source:  Money magazine 10/2003

Since those golden days, single-digit P/E stocks have grown so scarce that he has been forced to search in unfamiliar sectors. Eventually, he set his sights on a group that he dubs "fallen-angel growth stocks." They're companies with market or below-market P/Es that, by virtue of their consistently above-average earnings growth, he thinks are worthy of a P/E multiple 1.5 times that of the S&P.

One of Nygren's most recent such buys is Automatic Data Processing (ADP: Research, Estimates). Nygren contends that the market has overreacted to the end of ADP's 41-year streak of consecutive earnings growth and expects its payroll-outsourcing business to bounce back with the economy.

"It's highly likely that there will be more people employed five years from now than today," he says. "Plus, the outsourcing economics that have driven their success ought to continue -- it's still cheaper for ADP to process payrolls than for employers to do it themselves."

ADP has moved above $35 since Nygren bought it at around $33. Nevertheless, he's holding on, because a P/E of 1.5 times the market average would translate into a price of about $50.

Nygren's other recent purchase is motorcycle icon Harley-Davidson (HDI: Research, Estimates). For Nygren the Harley story is all about brand loyalty. "My former partner, Ralph Wanger, used to say that if you measured brand strength by the customers' willingness to tattoo the logo on themselves, Harley would be the most highly rated consumer brand in the world."

Much like ADP, Harley hit a pothole last year when its growth rate slowed and the waiting list for classic Harleys shrank. Investors bailed out, and Harley's P/E fell from 40 last year to 20 today; the stock trades at $48.

"There's almost no consumer-products company in the world that's producing only waitlist demand," says Nygren. "This is a superior company that deserves a superior multiple, but it's being priced in the market like it's a below-average business."

Ariel's Rogers is less effusive, perhaps because he believes stocks have already discounted much of the recovery. So while Rogers waits for a more value-friendly environment, he's making doubly sure his current holdings don't blow up on him.

He's shying away from any company that competes with Wal-Mart -- a strategy that's led him to luxury retailers Tiffany & Co. (TIF: Research, Estimates) and Neiman Marcus (NMG.A: Research, Estimates). Rogers has taken some profits in Tiffany but still likes both stocks.

A more unusual manifestation of Rogers' ultracaution is his use of private investigators -- former New York City cop Richard "Bo" Dietl and Deloitte & Touche gumshoe Lisa Dane -- to do background checks on management.

"I can't say we've found any smoking guns," says Rogers. "But if you find out that a CEO has homes sprinkled all around the country, it gives you some pause as to how much time he's spending on the business."

Grey Global (GREY: Research, Estimates) CEO Edward Meyer evidently passed muster because the ad agency is Rogers' favorite stock. "With an Olympics year and an election coming up, it's going to be a good environment for advertising," says Rogers. Moreover, at a recent $794 a share, Grey is about 20 percent undervalued based on Ariel's calculation of what Grey would be worth in an acquisition.

Of our foursome, Bob Torray seems the least concerned about the direction of the market or the economy. Maybe that's because he's never paid much heed to either.

"Our mentality is looking five to 10 years out," says Torray, who resists being tagged as a value investor. "The stocks we don't like and don't invest in are companies where the managements talk a lot about the stock or quarterly earnings," he says. "We don't care about that. We care about the business. The stock will take care of itself."

This led him to stick with J.P. Morgan Chase (JPM: Research, Estimates), despite a raft of regulatory and legal entanglements. "Their earnings power is tremendous," Torray says of Morgan, which he first bought six years ago. "Smart people know that any fines or [jury awards] are one-time events. This is not Bethlehem Steel -- they're constantly making money."

As for Davis, he says he's been feeling like the grizzled desk sergeant in Hill Street Blues who concluded every morning meeting with the reminder, "Let's be careful out there."

Davis maintains that the stock market is a scary place now. "Very few industries have any pricing power. The consumer is over-leveraged. You have China basically disemboweling the manufacturing sector. So once you get down to the bottom line, it's hard to see what's going to cause an explosive recovery in earnings."

Ironically (or maybe appropriately) the one stock Davis endorses without hesitation is one of his fund's biggest laggards: Berkshire Hathaway (BRK.B: Research, Estimates). "If people are going to own a stock, that's the one to own," he says. With "Baby B" shares at $2,523, Berkshire's P/E of 23 is its lowest since 1991. Davis is particularly enamored with Berkshire's net cash flow -- $15.7 billion in 2003's first half -- and Warren Buffett's unique ability to put money to work. Says Davis, "It's a terrific buy."