(MONEY Magazine) – Cruising nonchalantly down suburban Pittsburgh's narrow, winding Route 910 on his ruby-red Harley-Davidson, Ron Muhlenkamp looks like a latter-day Easy Rider. But this 53-year-old is no carefree biker. Rather, he's the hard-charging manager of the Muhlenkamp Fund (no load; minimum initial investment, $200; 800-860-3863), a $60 million stock portfolio that has accelerated 24% in the 12 months to April 28, besting Standard & Poor's 500-stock index by more than four percentage points. Over the past five years, the fund has returned an average of 17% annually, vs. the S&P's 16.1%.

Moreover, how Muhlenkamp bought his Harley--not how he rides it--provides insight into the man and his value-hunting approach to stocks. In 1993, he talked to Harley owners and dealers for more than two months before deciding to buy a reliable nine-year-old bike. It cost $7,500, about half the price of a new Harley. "Why pay a premium when I don't have to?" asks Muhlenkamp.

Similarly, he refuses to pay top dollar for stocks. Every quarter, he screens the 1,700 issues in the Value Line Investment Survey for ones with 15% or higher returns on equity (ROE), a measure of profitability. That's slightly above the S&P's average since World War II. He then weeds out companies with balance-sheet problems and winds up with a short list of solid companies that he's willing to buy--if their shares are trading at price-to-earnings ratios below their ROEs. "We buy Chevys and Buicks when they go on sale," Muhlenkamp boasts.

That hasn't been difficult lately. During the stock market's spring sale, technology shares slumped first and then financial stocks, which helps explain why bank, brokerage and insurance shares now make up half of Muhlenkamp's portfolio. His typical holding trades at only 15.6 times estimated 1997 earnings and roughly 3.4 times book value, vs. the S&P's average P/E of 23.5 and price-to-book ratio of 5.3. He usually holds a promising stock until it reaches his target price, typically when the company trades at its ROE multiplied by its estimated earnings per share. Since Muhlenkamp constantly reassesses stocks and raises the targets if warranted, he often owns shares for more than five years. That gives his fund an annual turnover rate of less than 25%, vs. 85% for the typical U.S. stock fund.

Of the 43 stocks he now holds, Muhlenkamp believes these five are selling at the deepest discounts--an average of 31%--to their true value. The stocks are discussed in descending order of their potential share-price appreciation.

--Green Tree Financial (ticker symbol: GNT; recently traded at $29.50; 1% yield; ROE: 25). Muhlenkamp started buying shares of this $3.8 billion (assets) St. Paul lender in 1990, when they cost only $2 each. By Feb. 5, 1997, the stock had climbed to $41.25 before sliding to $29.50 because of investors' fears about rising interest rates. Green Tree controls nearly 30% of the market for loans to buyers of manufactured homes. The company has also been expanding into faster-growing markets, such as high-interest (11% a year or higher) loans to home remodelers and to buyers of boats, horse trailers and even pianos. Muhlenkamp believes the stock, now trading at a P/E of 10, is worth at least 18 times earnings, or $54 a share, an 83% gain from here.

--Graco (GGG; $23.50; 2.4%; ROE: 19). In the past three years, sales of this $410 million (annual revenues) industrial equipment maker in Minneapolis have increased only 9%. During that time, however, Graco has cut costs 3%, helping to more than double its profit margin and its earnings. The company's fastest-growing segment is sales of lubricating pumps, hoses and meters to quick-service oil-change centers. Their business is expected to boom as the proportion of auto owners who change their own oil continues to drop--from 60% five years ago, to 50% today and an estimated 40% within five to seven years. Based on Graco's high ROE, Muhlenkamp expects the stock, now trading at a P/E of 11, to climb 74% to $41.

--Reliance Group (REL; $11.00; 2.9%; ROE: 16). In the past five years, this $11 billion (assets) New York City insurer has abandoned the competitive life insurance market and virtually stopped writing homeowners insurance. Today about 75% of Reliance's revenues come from its commercial property and casualty business, where the company can better control potential losses by refusing to sell policies to high-risk customers. Reliance has also boosted sales of title insurance by about 16% to a quarter of overall revenues. With the shares trading at only 11 times earnings, Muhlenkamp believes the stock ought to trade at $16, for a 45% profit.

--Idex Corp. (IEX; $26.25; 1.8%; ROE: 25). This $650 million (revenues) Northbrook, Ill. company manufactures fire-fighting and rescue equipment, as well as steel bands and buckles for industrial machinery. "But what Idex really makes is money," says Muhlenkamp. Since the company was formed in 1988, its cash flow has swelled an average of 34.7% a year to $64.5 million last year, enabling Idex to make 11 acquisitions. Even though the acquisitions have helped pump up Idex's earnings an average of 22% annually over the past five years, the shares trade at only 13 times earnings. Muhlenkamp believes the stock is worth at least 18 times earnings, or $35, for a 33% gain.

--Conseco (CNC; $41.25; 0.3%; ROE: 22). In 1993, Muhlenkamp became convinced that consumers would step up spending for "peace-of-mind products" such as annuities, insurance and mutual funds. So he began investing in this $26 billion (assets) Carmel, Ind. insurer at $13 a share. Since then, annuity sales, about 41% of Conseco's 1996 premium income, have swelled more than 30% a year industrywide. Last year, Conseco made six acquisitions to secure its position as a leading provider of long-term-care insurance and other policies to Americans over age 40, the industry's fastest-growing segment. Based on Conseco's strong ROE, Muhlenkamp believes the stock could rise 12% to $46. He adds: "We think of this company as a retailer of financial products, just as Wal-Mart is a retailer of consumer goods."

ALL STOCK DATA AS OF MAY 1