(FORTUNE Magazine) – They say beauty is only skin deep, and nowhere is that more true than on Wall Street. Last year the hype bounced from B2B stocks to networking companies to fiber-optic equipment makers, as hordes of investors chased the next new thing and were repeatedly disappointed after each trend collapsed. Why such persistent faith in momentum stocks--and so little research into the financials underlying them? Unfortunately, popularity in a frothy market usually doesn't have much to do with a company's balance sheet. Which seems doubly unfair given that hundreds of out-of-vogue companies with healthy financials were (and still are) languishing in the bargain P/E bin.

That's where Bob Olstein, manager of the $600 million Olstein Financial Alert fund, likes to find his winners. Olstein is one of the most scrupulous number crunchers around. In the early 1970s he started publishing the Quality of Earnings Report, which notified institutions when companies they had invested in were using shady accounting practices to boost earnings, and he's been hunting for companies with low debt and superior cash flow ever since. Unlike most fund managers, Olstein doesn't bother jockeying for meetings with corporate executives, opting instead to let the numbers speak for themselves. Though the companies he buys are--how shall we put this?--not exactly sexy, his fund's five-year return is a true thing of beauty: up an annualized 27%, putting him near the top of the fund industry and earning a five-star rating from Morningstar. Oh, and George Soros is his largest shareholder.

We enlisted Olstein to help us judge a beauty contest of sorts, looking for companies with the most attractive financials and reasonable prices--sectors where the momentum crowd wouldn't bother to look right now. The three we finally chose--a semiconductor company, a luxury retailer, and a maker of motor homes--may seem counterintuitive, given fears of a slowing economy. But that's precisely the point: Olstein buys when other investors have already run screaming for the exits. That's when he can get the best deals on solid, well-run companies that may not turn around overnight but have the potential to reward those with a little patience. Moreover, because of his attention to the financials, there's little risk of being surprised by an accounting glitch or earnings blowup.

All three of our stocks now sell at a sizable discount to their private market values and have manageable debt (Olstein's definition: companies that can pay off their obligations in five years or less, based on current cash flow). They also all have sound accounting practices and are currently generating excess cash from operations. Let us repeat: These aren't glamorous companies. But in this beauty contest, as another saying goes, it's what's on the inside that counts.

National Semiconductor (NSM, $25): It's pretty much an all-out chip war these days. Prices have been trending downward for years, thanks to strenuous competition. And this year PC sales were soft, leaving manufacturers like National with rising inventories and declining sales. So what is there to like about National? For one thing, all the bad news is already out in the open. "It's an operating risk--the bet is that the semiconductor industry is going to turn around," Olstein explains. "But I don't have to take financial risk. If I'm wrong, I'm not going to be that wrong, because we always go back to the balance sheet and the income statement." By those measures, the company is in good shape, largely because management has taken an aggressive hand in streamlining operations. National sold off its underperforming PC microprocessor unit in 1999, reaped over $200 million from the sale of its stake in Fairchild Semiconductor, and managed to lower its debt/equity ratio from 0.5 a year ago to just 0.1 in August. At the end of last quarter, National's balance sheet boasted nearly $900 million of cash on hand, and the stock is dirt cheap, selling at just over 11 times earnings.

"It's an attractive opportunity at these levels," says Tore Svanberg, senior semiconductor analyst at Robertson Stephens in San Francisco. He points out that the company is trading at only two times 2001 sales, while close competitors trade at five or six times sales. Though analysts say there's still a lot of uncertainty as to when PC demand is going to pick up again, "the wireless situation seems to be easing," says Svanberg, who notes that 25% of National's business comes from wireless products. Plus bulls see huge growth potential in National's Geode processor, which already hums inside the new set-top AOL-TV boxes and Internet devices like Audrey, made by 3Com. The company announces fiscal 2001 third-quarter results in March and has warned that they will be soft. But Olstein, for one, is convinced that despite the industry troubles, the company has the financial wherewithal to thrive.

Zale (ZLC, $36): All right, so Zale doesn't exactly have the cachet of Tiffany's little blue box. And some investors may still associate Zale with its early-'90s bankruptcy, before the company staged a remarkable turnaround. But with Tiffany trading at 30 times earnings, Zale seems a much better bet at a P/E of 12. Besides, what Zale does have is heft. As the largest specialty-jewelry retailer in North America, Zale operates 2,350 locations under the Zale name as well as Gordon's Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, and the recently acquired Piercing Pagoda. The stores are mostly in malls, and each caters to a specific income level, from Tag Heuer watches at Bailey Banks & Biddle to ear piercings for teens at Pagoda.

As the economy has slowed down, so has Zale. After 26 straight quarters of meeting or beating earnings, the company came in on the low end of estimates for the first quarter of 2001 and scaled back expectations for the second quarter as well (which it will announce Feb. 14). Analyst Harry Ikenson of J.P. Morgan is "cautious in the near term" while waiting for that announcement, but he says that the longer-term prospects are still bright: "This is a great management team, they're terrific operators, and they're taking share in the industry." Over the past five years the company has averaged 28% earnings growth, compared with 15% for other jewelry retailers and 9.4% for the S&P. In terms of the financial nitty-gritty, Olstein likes the company's $40 million in positive cash flow this year. Plus Olstein gives management his ultimate compliment: "They've got really clean accounting," he says.

Thor Industries (THO, $25): No doubt this motor-home company hit a bad stretch of road last year. That's when Thor got tangled in the web of rising interest rates, high gas prices, and a faltering stock market. The result was that fewer people rushed out to buy motor homes, its primary business. Still, there are some bright spots: Thor is also the largest manufacturer of midsize buses in America, a business that grew a healthy 19% over the past year. The company is also developing zero-emission transit buses that will be built in the coming months.

And Olstein, who has owned the stock on and off for several years, insists that the fundamentals remain strong. Today his discounted cash flow models show the company is worth $40 a share. "Here's a company with no debt and around $50 million in cash, in an industry that's had a temporary slowdown, and we're buying it for eight to nine times earnings," he says. Olstein likes to look beyond the next few months--where uncertain economic conditions and high gas prices will likely persist--to the macro-picture of road-ready baby-boomers moving into retirement. He's not waiting to buy shares, he says, because today "we're getting it at the right price." And in the end that's what it all comes down to. "After all, if you pick a good company at the wrong price, it's no different from picking a bad company."