Matthew Fahey, manager of the Marshall Mid-Cap Value fund, is a contrarian, no doubt about it. "Our philosophy is simple," says

Fahey. "When a stock gets too high, we sell. And when it gets too low, we buy. We take advantage of fear and greed." So with so much fear in the market these days, Fahey is quite busy.

CVS     Price (close 8/31/02)  $29.39  52-Week High  $38.81  52-Week Low  $22.89  Market Cap (Bil.)  $11.5  FY 2001 Revenues (bil.)  $22  FY 2001 Income (Mil.)  $399  FY 2002 EPS Estimate  $1.71  FY 2003 EPS Estimate  $1.91  P/E Ratio (FY 2002 Est.)  17.2  P/E Ratio (FY 2003 Est.)  15.4   Data through 8/31/02.  Sources: CVS Corporation, First Call, Morningstar.

Right now the straight-talking Midwesterner, who has managed his $211 million fund for five years, is loading up on shares of drugstore chain CVS. The former stock market darling had posted double-digit earnings growth for 17 quarters in a row when it ran into trouble in the middle of 2001. The stock has since fallen from more than $60 to less than $30. Yet Fahey believes CVS' problems are behind it and thinks the stock could rebound to $45 within 18 months, a 60 percent jump. What went wrong at CVS? For one thing, it couldn't find enough skilled pharmacists to staff its 4,000-plus stores because of an ongoing shortage in the United States. Service suffered as a result and sales declined. This was particularly troublesome because pharmacy sales account for more than 60 percent of revenue. And the pharmacist shortage wasn't the only problem. A rising level of theft hurt earnings, as did increased price competition from rival drugstore chains on nonprescription items.

The problems, however, are well under control, according to Fahey. For starters, CVS has been recruiting pharmacists with vigor and has succeeded in hiring more, so service should be improving. Security has also been tightened. CVS has moved expensive items behind the counter and changed displays of items like the Gillette Mach3 razor: Now, only one razor is on display at a time, making it harder to steal this kind of merchandise. In addition, the chain has closed more than 200 underperforming stores and shuffled management.

What will come of the changes? Wall Street is looking for CVS to earn $1.71 per share in 2002, up from $1.56 in 2001. For next year, analysts predict that the company will earn $1.91 per share. That gives CVS a P/E ratio of about 15 based on expected 2003

earnings-well below the current market P/E. And because CVS has a stronger balance sheet than some of its competitors (Rite Aid, for instance), Fahey believes CVS is in a better position to survive the brutal price competition that is a hallmark of the cutthroat chain-drugstore industry.

"We like companies where there is a temporary hiccup, but the overall business is healthy," says Fahey. "CVS fits that profile."

Fahey started buying CVS late last year and he is still buying it. His average purchase price is in the low 30s. The stock accounts for 2.5 percent of Fahey's fund, making it the seventh-largest holding. Other major positions include nursing home operator Manor Care, railroad CSX, and Bausch & Lomb, an eyecare products maker that is in the midst of a turnaround.

Fahey has a good record when it comes to spotting companies that are poised to bounce. His picks have helped Marshall Mid-Cap Value score an average annual return of 8.2 percent in the past five years. And for the past three years, his fund is up 9.6 percent annually, putting it among the top 15 percent of its midcap value peers. Even better, since the Nasdaq bubble burst in early March 2000, Fahey has turned a $10,000 investment into $14,720, an annualized gain of 17 percent.