(FORTUNE Magazine) – The investment advisers at Harris Associates in Chicago are staunch believers that some of the best things in life can be found in one's own backyard. Among the firm's 50 largest holdings, eight are companies based in or near Chicago < and 11 others are no farther away than Pittsburgh. Harris manages $1.8 billion in assets, half for pension funds. According to CDA Investment Technologies of Silver Spring, Maryland, which tracks the performance of investment advisers, Harris had the third-best equity-investing record in the U.S. over the past three years. Its stock portfolios have provided total returns -- capital gains plus dividends -- of 23% since the beginning of the year, well ahead of the 17.5% total return of Standard & Poor's 500-stock index. In a recent interview Robert Harper, 40, the director of research at Harris, talked about some of his firm's backyard bonanzas. Which Chicago companies do you like best? One of our favorites is Wrigley, the chewing gum company. It does not appear cheap on a price-earnings basis, nor on a book value basis, but look at what has been happening to the value of brand names -- the General Foods and Nabisco buyouts. We think Wrigley has one of the premier brand names in the world. Another is the Tribune Co. If you look at the discrete parts of its media businesses, such as the Chicago Tribune and WPIX-TV in New York, they add up to a number that is higher than the current stock price. You sound as if you believe both companies are takeover targets. I think it's possible in the case of Wrigley, although we didn't buy the stock for that reason. As for the Tribune, we don't think the company is going to be taken over. We just feel it is undervalued. Tribune has a price-earnings multiple of 16, well above the multiple for the market as a whole. Yes, but these businesses trade on cash flow and on the value of individual properties, be they newspapers or TV stations. If you add it up in those ways, the stock looks very attractive. What other Chicago companies do you like? Another we own is DeSoto, a low-cost producer of paint. The company earns high returns on equity. We think it is reasonably priced relative to both earnings and book value, but what really attracts us is that it generates lots of excess cash. Don't you own a number of regional bank stocks? Yes. We've avoided the money center banks and the Texas banks because we never really understood what their loan portfolios were worth. American Fletcher of Indianapolis is a bank we like. It sells at only a modest premium to book value. Any trouble in its loan portfolio? No, although it had some problems in real estate a number of years ago. It has a lot of solid commercial and consumer loans. First Bank System of Minneapolis is another stock that we've bought recently. The bank has had some problems with both commercial and agricultural loans, but we think it is in the early stages of a strong turnaround. Its loan problems have peaked. You also own a Colorado bank. Banks in that state have had a heap of trouble recently. Colorado has had problems in agriculture, real estate, and oil, so four of Colorado's five largest banks have had earnings problems. We own a bank called IntraWest. Nonperforming loans as a percentage of total loans have been relatively stable for three quarters, and the stock sells at a discount to book value and a very cheap multiple of the earnings we think it can achieve a couple of years out. The stock has been around $14 a share, and we think the bank will earn about $1.35 a share this year. When the Colorado economy gets going again, it will earn $2 a share and more, and the stock will sell for easily $20 a share. Speaking of trouble, do you own any savings and loan institutions? Yes, we think there are a number of high-quality S&Ls with very solid loan portfolios and high capital ratios. We like institutions with capital ratios of 6% to 10%, which is a higher equity-to-asset figure than your normal bank. Our favorites are Citizens Financial of Rhode Island, Boston Five Cents Savings, and Baltimore Bancorp. Hardly big names in the industry. The big names generally don't have the strong capital ratios. They may be followed by more security analysts, but that means they are more efficiently priced. The S&Ls we own sell at a fraction of book value, whereas Golden West Financial in California sells at 190% of book. The good S&Ls are becoming more attractive every day. As old mortgages roll off, the S&Ls put new ones on, lifting the average interest rate on their portfolios closer to market rates. The only manufacturer you've mentioned is DeSoto. Do you have any others in your portfolio? We have a number of what we call chicken cyclicals -- they're a way to play the business cycle without taking extreme risks. These are companies that don't have extreme ups and downs. Even when their businesses are down, they still have strong balance sheets and healthy cash flow. One of them, Witco Chemical, a specialty chemical company, is our third-largest holding. Sheller- Globe, an automotive parts supplier, is another undervalued, well-run company. There has been a trend among automakers to give their good outside suppliers more business and bigger market share, and we think Sheller is poised to benefit from that trend. A. Schulman Inc. is another chicken cyclical. Schulman makes plastic compounds, and the auto industry is a big customer.