(FORTUNE Magazine) – When trouble strikes a company, ordinary investors flee. Michael Price pounces instead. Litigation? No problem. Regulatory scare? He's there. Price, 41, president of Heine Securities in Short Hills, New Jersey, manages $5 billion in four mutual funds, and his penchant for distress pays shareholders well. His Mutual Shares and Mutual Qualified funds each returned 15.9% annually over the past ten years, vs. 14.4% for the S&P 500. Both are closed to new investors, but Price's other funds are not: Mutual Beacon, a growth fund that was a hot performer in 1992 (22.9%, vs. 7.6% for the S&P), and the new Mutual Discovery fund, which concentrates on foreign small-cap stocks. Price tells Fortune's Shelley Neumeier where to buy the best distressed stocks now.

How does a value investor like you play a market like today's? The Dow is 3500, and the market is very expensive, but every day we come in and find things to do. There are always weak stock groups -- especially with someone like Clinton in the White House. You had a cable bill and saw those companies drop. You saw parts of Hillary's health care proposal start to be floated, and the drug companies came way down.

Which weaklings do you like best? We are buying some of the banks. The market's latest worry is that as the economy picks up, interest rates will rise and bank earnings will go to hell. Well, that's just not the case. First Chicago, which we're in love with, fell from $45 to $35 a share in a matter of weeks. At $39, where it traded recently, it's cheap. The bank is very well capitalized, has a book value of $35 a share, and is earning 20% on equity. When you add up the value of each part of the business -- corporate banking, consumer banking, middle-market banking, venture capital, and credit cards -- the stock is worth $70. The market has really missed this one.

What are you buying in health care? One of the great disasters of 1992 was the merger of Medical Care International, an outpatient surgery company, and Critical Care America, which specializes in home infusion, the delivery of medical services in patients' homes. The merged company, Medical Care America, reported lower than expected earnings, and the stock fell from $55 a share to $23. We went to Dallas and met the management. We think they're competent and very focused on cutting costs, so we took a large position. The stock is now at $16 and trading for ten times 1993 earnings, and management is using some of the company's $180 million in cash to buy back stock. The price can get to $25 or $30 within 12 months as earnings firm up.

Any other good disaster stories? National Medical Enterprises, which owns hospitals, is being sued by insurance companies and patients for fraudulent billing, keeping patients longer than necessary, and performing unneeded procedures. I don't believe any of it. NME will be able to resolve the litigation favorably. The company just won a suit in California in which the complaint was similar to those of the insurance companies. The stock trades for $9 a share -- down from $25 in 1991. The value is between $15 and $20.

Do any restructurings attract you? The merger of Amax and Cyprus Minerals is a smart deal. Amax has assets in aluminum, coal, oil, natural gas, molybdenum, and gold. Cyprus Minerals is a very smart, well-run outfit with big interests in copper and coal. Amax will spin off Alumax, its aluminum operation, and distribute 28% of its interest in Amax Gold, its gold subsidiary. If you buy a share of Amax today at $22, you'll have three pieces of paper in a few months. You'll get a share of Alumax, which will trade for at least $10. You'll get half a share of Cyprus Minerals, worth $12. And you'll get about a quarter of a share of Amax Gold, worth about $3, essentially for free. It's a lot like buying Sears Roebuck and getting big chunks of Allstate Insurance and Dean Witter Discover thrown in.

What's appealing about the Sears deal? If you buy Sears now, you pay $55 for the stores, Allstate, and Dean Witter. Sears just sold 20% of Allstate in the market for $27 a share, but still holds roughly one share of Allstate for every share of Sears stock. I expect Allstate to go up quickly to around $30 a share. This summer Sears will spin off the 80% it still owns of Dean Witter, and you'll get 0.4 of a share of Dean Witter for each share of Sears. If Dean Witter trades around $36 a share, that 0.4 share will be worth about $15. So you end up having paid only $10 a share for the retail operation, which Sears is turning around. In addition, you have everything else the company owns -- Sears Mexico, Sears Canada, and a lot of real estate all over the U.S. Though Sears stock has gone from $35 to $55 over the past two years, it's still a really good value.

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