(FORTUNE Magazine) – A sailor at heart, investment maven Katherine Busboom Magrath, 54, set up shop in the yachting mecca of Marblehead, Massachusetts. With her yawl Gesina moored nearby, the chief investment officer of ValueQuest tacks against prevailing investment sentiment to rack up cutting-edge returns. To wit: Managing some $750 million of blue-chip institutional money, she earned 17.7% a year over the past three years, vs. the S&P 500's 13.3% annual gains. Her global and international portfolios also beat the market. How does Magrath succeed so far from the landlubbers of Wall Street? One way is by keeping a close watch on the courses charted by the skippers of various corporations whose share prices are sinking. FORTUNE's John Wyatt spoke with Magrath to find out what's new on her horizon.

It seems you spend a great deal of your time sifting through distressed companies.

Exactly. We aim to find the gems that are hidden there. We run screens to create a universe of stocks that are among the 20% most undervalued in three categories: earnings, assets, and quality.

There is always something wrong with these companies that has driven the stocks down. The problem may be cyclical, in which case it just takes time for stocks to get back to fair value. But often management is the key impetus to bringing a stock back to life. If we see that management is taking concrete steps, we know that shareholder value will eventually be unlocked.

I see you own Liz Claiborne. Is that an example?

It's classic. The stock, at just under $23, is 55% off the high set in 1991. The company did well until its management got carried away and started overly diversifying away from the traditional sportswear and dresses that generate the best sales.

In May the company got a new CEO, Paul Charron, who'd been chief operating officer since last year. He came from the old Vanity Fair, one of the best-run companies in the apparel industry, which is a tough business. Charron is turning things around. He changed the top people's compensation to reward performance. He's cutting costs by over $100 million and speeding up the time a new design gets to market by 25%. The stock could be in the low $40 range in the next three years, which is our typical investment time.

Do you own any other consumer stocks?

Whirlpool. At $56 the stock is 24% off its high and has underperformed since early last year. It sells at a 16% discount to the market, when it really should sell at a premium. Sales of its home appliances in Latin America will double by the year 2000. By 2010, sales in Asia will be as large as current sales to Europe and the U.S. combined. David Whitwam, the CEO, is a tough taskmaster and a superb long-term planner in the General Electric mold. We think that shares will trade in the high $90 range in three years.

Are you finding good value overseas?

We like the American depositary receipts of Toyota and Scitex, an Israeli company that makes a wide range of products for graphic design, publishing, and video production. Toyota's ADR got beaten down as the whole Japanese equity market declined. But the company is the world's premier auto manufacturer, with an excellent product line. We also like the recent appointment of Hiroshi Okuda as president--he's an aggressive, market-focused leader, not in the usual Japanese mold. We look for the $40 ADR to reach $76.

The manager who will really give Scitex a good kick is Shimon Alon, who did a great job as head of European marketing and is now here to beef up marketing in the States, where the company generates 50% of its revenue. The ADR is just over $19; we think it will be at least $30.

You just bought some oil services stocks. Some interesting opportunities?

The industry's cycle has bottomed out, and companies that survived consolidation have good managements. We like Tidewater, a boat company that supplies offshore rigs. It has 25% market share in the business, five times greater than its nearest competitors. The company has a competitive advantage because of its ability to deploy vessels to any region in the world where the highest day rates are available. Right now its boats are all over the world, including the Middle East, Southeast Asia, and Africa.

Last fall longtime CEO and founder John Laborde retired, and Bill O'Malley, a former CEO of Sonat Offshore, took over. He's taking an already well-managed company and giving it a shot of new blood. The $24 stock should reach the mid-40s.

At just $7, Rowan Cos. is a real contrarian play. Its offshore rigs are increasingly busy. The share price could double within three years.