(MONEY Magazine) – STOCKS TO MAKE A VALUE MANAGER SMILE

Even before the late-August debacle, overseas economic turmoil and earnings disappointments at home left 40% of NYSE- and Nasdaq-listed companies selling at 40% below their 52-week peaks. Value fund managers, the cheapskates who sift through Wall Street's bargain bin, say they're finding deals for the first time in years. Here's what four of the better ones are buying.

Rick Behler, manager of MAS Value Advisors, sees opportunity in economically sensitive companies that have a slowdown discounted into their prices. "Some of these stocks are valued below the trough of the 1990-91 recession," he notes. His favorite is Case Corp., a maker of farm and construction equipment. It's fallen to $27 from its spring high of $73.

Brian Posner, manager of Warburg Pincus Growth & Income fund, is buying more Washington Mutual, one of the few financial stocks he owns. The Seattle savings and loan, at $32, is near its 52-week low. Posner likes two recent acquisitions in booming California and figures the thrift will post improved net margins and credit quality. At less than nine times his 1999 earnings estimate of $3.70, it's one of the cheapest banks around.

Brian Rogers of the T. Rowe Price Value Fund looks for companies that are buying others with cash; that tells him they have strong convictions about their deals. One acquirer he's picked up is Hercules, the specialty chemical maker that's buying BetzDearborne for $3 billion. At $25.50, Hercules is off 50% from its high, as investors flee cyclicals. The stock's dividend yields 4%.

Curtis Jensen of Third Avenue Value Fund has been buying what he calls a "ridiculously priced" company: Vancouver, B.C.-based Timber West Timber Trust, a REIT that owns 825,000 acres of land and mills. The company supplies the Japanese housing market, and at a recent $5.50, its stock has been halved. Jensen sees the REIT as a cheap buy on a commodity, with a Canadian currency play as a boost. And it yields 12%. --PABLO GALARZA

WHEN'S THE RIGHT TIME TO HIT THE GAP?

Shares of Gap have notched a 37% average annual return over the past decade. At a P/E of 32, the stock is pricey, but Donald Trott of Brown Bros. Harriman has a way to pick your entry point. In the 1990s, Gap's profits have grown in zigzag fashion. For the 12 months ended in July in even-numbered years, the clothier's profits have increased an average of 41%. In odd-numbered years, profit increases have averaged just 3.5%. (For retailers, July, like January, is a transition point as seasonal stock is moved out.) Trott suggests trading the stock to take advantage of the way Wall Street comes up with consensus growth rates. Buy shares in early spring of odd-numbered years, when growth seems to have slowed and the stock has been sliding. By late spring, Wall Street will ratchet down its three- to five-year growth estimates. But growth will soon pick up, Gap will beat estimates and the stock will head north. Sell the following spring. Trott's strategy has worked in every year but one this decade. Spring '99 is coming soon. --P.G.

JUST BUY IT? OR JUST SAY NO?

With a 40% decline in earnings for the year that ended May 31, falling levels of future orders and the possible retirement of super endorser Michael Jordan, you might not think it's time to load up on Nike. But when the sneaker king's dismal results were released on June 30, four analysts--from BT Alex. Brown, DLJ, Goldman Sachs and Morgan Stanley--found reason to upgrade, saying declines in future orders and earnings appeared to have bottomed. Looks like they were early. Since the upgrades, Nike has gone from $48.50 to $34.50. It's likely to remain dead money until sales come back. --DUFF MCDONALD

ART'S BACK; BUY AN ART SELLER

Value manager Ron Baron has set his sights on the finer things. His funds now own 34% of Sotheby's Holdings, parent of the 250-year-old auction house. "Art prices have only recently returned to the levels they were at nine years ago, so we haven't gotten the boom that other areas have benefited from," says Baron. He thinks Sotheby's can double earnings over four years, even if a bear market makes people feel less wealthy. He may have the chance to test his faith. --SARAH ROSE

FOLLOW THE INSIDERS

"There's no better tip-off to the probable success of a stock than that people in the company are putting their own money into it." That's what Peter Lynch wrote in 1989. Frank Ponticello, a Prudential Securities analyst, has taken those words to heart. Last year Ponticello started searching for stocks with three or more insiders buying and no insider selling over three consecutive months. He then used technical analysis to cut that list further. So far, so good. In the 12 months that ended Aug. 1, Ponticello's picks soared 25%, more than double the benchmark S&P MidCap 400. Three favorites: life insurer Conseco, catalogue marketer Fingerhut and restaurant chain Cracker Barrel. --Malcolm Fitch

DON'T FEED THIS GORILLA

Hot off its Aug. 3 listing on the New York Stock Exchange, German software maker SAP AG is looking like a gorilla, the new buzzword for companies with the power of a Microsoft, Intel or Cisco. The dominant player in enterprise software--applications that help companies manage such tasks as accounting and human resources--SAP has 36% market share that's three times its top competitor's.

But the stock is already as expensive as they come in the jungle. At $41.75, SAP is trading at 54 times estimated 1999 earnings, or 1.6 times projected earnings growth. That's a near-Microsoft valuation, and it's above both Intel's and Cisco's--two companies with a lot less to prove than SAP. "SAP deserves a premium, given its market position," says BT Alex. Brown analyst James Moore, "but not that premium." Here's an alternative: Buy the chimp, No. 2 player PeopleSoft. Its 45% growth rate beats SAP's, and it's priced at a more reasonable 31 times 1999 earnings. --D.M.