(MONEY Magazine) – Does anyone believe in good old-fashioned value anymore? Growth managers these days dismiss the concept altogether; it'd be tough to buy tech stocks otherwise. Now even some value managers are looking past traditional measures like price/earnings ratio and book value. For example, regular MONEY readers know all about Legg Mason Value's Bill Miller, who's delighted shareholders but scandalized value purists with picks like America Online and, more recently, Amazon.com.

Oakmark's Bill Nygren is also earning a reputation as one of the best of this new breed of value investor with his performance at Oakmark Select, a fund designed to invest in just 15 or so companies. Unlike most value funds, it has bested the S&P 500 over the past three years, with an average annual return of 22.5% through Sept. 11. In March, Nygren took over the flagship Oakmark fund, which had been sinking under former manager Robert Sanborn's deep-value picks, such as beleaguered tobacco giant Philip Morris and toymaker Mattel. (Transformations take time: Oakmark is still well behind most midcap value funds this year.)

Nygren tries to determine what a company would be worth to an acquirer and buys if he can get it for 60% of that price--a tactic that at times has led him to tech and biotech stocks, as well as to more typical value plays. He recently discussed his current favorites with MONEY's Laura Lallos.

Q. Why should investors choose Oakmark over Oakmark Select? Why not concentrate in your favorite picks?

A. An investor buying Oakmark today is unlikely to have capital-gains distributions for several years because of the fund's accumulated losses. For a new investor, it's a nice tax-saving opportunity. And some investors won't be comfortable with the volatility that you get in Select.

Q. You inherited Philip Morris and Mattel when you took over Oakmark. What's your take on these stocks today?

A. Philip Morris was never my favorite stock. Analysts have underestimated the problems that tobacco litigation has caused and will cause. But if you look at its food business and price it in line with other public food companies, that alone is worth $30 a share. Figuring the stock should be priced in the $30s, I didn't want to sell when it was in the $20s.

Mattel is an example of investors punishing a company for its history rather than looking ahead. The CEO running this company now, Robert Eckert, did great things at Kraft, building brand value and cutting costs. Mattel at $10 is a very different investment than Mattel at $25. When I took over the Oakmark fund, I wanted to diversify the portfolio. But I left Mattel at over 3% of fund assets because it's among the most attractive stocks we own.

Q. One distinction between value managers today is that some buy tech stocks and some don't.

A. Up until Warren Buffett, it was out of school for a value buyer to pay more than book value for a stock. Warren said, this is silly, the best asset of a company like Coke is its brand recognition. That started the move away from statistics like P/E and price-to-book.

Back in the early '90s, our cable investments were innovative for a value firm. They had negative book value--but clearly there was substantial business value being accumulated. Biotechnology, which I've been in, strikes people as not true to value. To me, being true to value means you buy a stock when the price is lower than what you think the business is worth.

Q. That's how Legg Mason Value's Bill Miller justifies owning Amazon.

A. Even though I dramatically disagree with Bill on Amazon, I think his thought process is right. The focus that some value investors have on P/E and book value is misplaced when it comes to this company. There is no way traditional financial analysis can evaluate the key variables, which are that the company is creating a customer list of online buyers, that it costs a certain amount to get each customer and that there is an amount you can expect those customers to spend.

Now, I can't make the math work on Amazon; I think the assumptions you have to make about the stickiness of their customers, as well as about potential customer spending, need to be very optimistic. But Bill has the right approach: to set a business value based on your expectations of the future. If the stock is at a significant discount to that number, then it is a value stock.

Q. You and Miller have a more traditional value play in common, the giant savings and loan Washington Mutual. Are worries about rising interest rates hurting the stock?

A. I have a hard time understanding what interest rates have to do with the long-term value of the Washington Mutual franchise. Over time there ought to be as many times that rates go down as there are that they go up. But people react very strongly to a lot of short-term noise. For us it's a wonderful opportunity.

This is a low-cost service provider to a large and growing customer base, with a management whose sole goal is maximizing per-share business value. It ought to grow substantially faster than other financial services companies. The pending acquisition of Bank United in Texas fits the firm's model of moving into geographic areas where it can grow and is consistent with management's value-sensitive approach to its acquisitions.

Q. Let's talk about Toys R Us. You've singled out the hiring of new CEO John Eyler as the best thing going for the company. How do you get a handle on a company's management?

A. One thing I want to see is how much they are personally betting on the company. John had a very successful career in the toy industry as CEO of F.A.O. Schwarz. He came to Toys R Us for an options package and then bought stock with his own money. And there is no substitute for sitting down across the table from somebody and asking questions. When I met with John, he was like somebody who was planning on building a new house; he was pulling out the blueprints for the new stores, saying, "See, this is how we are going to do bicycles!" That's an excitement level you just didn't see in the old Toys R Us management.

Q. Again, you're in good company with Bill Miller on this stock. You admire Miller, you've complimented Chris Davis of the Davis Funds. Are you a fan of any other value managers?

A. Mason Hawkins at Longleaf Partners, Jim Gipson of Clipper, Bill Ruane of Sequoia, Wally Weitz of Weitz Value...there aren't many of us left.