By Junius Ellis

(MONEY Magazine) – Few people other than his clients recognize the name of today's hottest fund manager: Gary Pilgrim, 52, of Pilgrim Baxter Greig & Associates, a Wayne, Pa. investment firm with $2 billion under its control. One reason is that Pilgrim and his six partners work for big institutions and just one tiny mutual fund called PBHG Growth (the extraneous H stands for a former partner). With a scant $8 million invested mainly in smaller stocks, the seven-year-old fund isn't large enough to qualify for MONEY's fund rankings (see page 135). It's also been marketed by the equally obscure $250 million Capstone fund family with an annoying 4.75% load -- though not any longer. (See left for details and the fund's new toll-free phone number.) Here's what you likely missed: In the 12 months to July 1, PBHG Growth led all diversified funds with a 69% return that blew away both its small-cap group (up 25% overall) and the S&P 500 index (up 14%). The fund also excelled over the past five years, returning 153% relative to its peers' 96% and the S& P 500's 94%. Pilgrim's top-performing formula? "Buy smaller growth stocks whose earnings promise to accelerate faster than most analysts have forecast," he explains. To reduce the inherent risk of owning fledgling growth stocks, Pilgrim bets only on the fittest. The five companies he recommends below have almost no long-term debt, vs. the 36% debt-to-capital burden for the S&P 500. His picks' average 20% return on equity -- a key gauge of their capacity to self-finance future growth -- is almost double the norm. And he's confident that, over the 12 months to June 30, 1994, the five as a group can deliver torrid 45% profit growth -- the best proxy, he says, of a stock's potential appreciation. By comparison, Pilgrim expects the S&P 500's earnings to grow 20% over the next four quarters. "Yet my stocks," he says, "are priced just 29% above the market's recent earnings multiple of 18," based on his profit forecast to mid- 1994 (see the table on page 149). His five favorites: American Power Conversion (ticker symbol: APCC). This West Kingston, R.I. firm is the leading maker of computer power-supply protectors priced from $200 to $4,000. And business is booming, says Pilgrim, as the company's corporate customers forsake mainframes for networks of brawny -- but brownout vulnerable -- desktop PCs. Over the past five years, APC's annual sales expanded twentyfold to $175 million, while profits compounded an electrifying 83% annually. "I'm betting the firm can maintain a 67% growth rate for both the current year to June 30 and the next four quarters," Pilgrim says. Bombay Co. (BBA). While receipts at U.S. retailers rose a miserly 4% in May, the latest period reported, Bombay's same-store sales (revenues at stores open at least a year) shot up 32%. A fluke? Hardly, Pilgrim says, noting that fiscal '93 revenues at this Fort Worth-based chain of 381 home furnishing outlets should hit $220 million, nearly doubling in just three years. The big attraction, he explains, is affordable, assemble-it-yourself knockoffs of 18th- and 19th-century English furniture with money-back guarantees and sold in malls (average price tag: $100). Hot tickets include $239 faux mahogany headboards (queen size) with cushioned panels you can easily cover in the fabric of your choice. "I'm looking for 53% profit growth for both the year to June 30 and the following 12 months," says Pilgrim. Sun Television & Appliances (SNTV). Home electronics, especially PCs and big-screen TVs, are moving fast at this low-profile $399 million chain of 32 superstores in Ohio and western Pennsylvania. Pilgrim notes that fiscal '93 same-store sales at Columbus-based Sun jumped 13%, compared with a 7% gain for $3 billion Circuit City, the sector's Wal-Mart. Reason: "Sun has quietly become the dominant discounter in markets that so far are too small to attract Circuit City," he says. Pilgrim expects earnings to surge 60% over the year to June 30, then 37% over the next four quarters. Healthsource (HS). Pilgrim says this $205 million Concord, N.H. company also thrives in smaller, less cutthroat regional markets -- in this case for health maintenance organizations, the likely big winners in the White House's health- care reforms. Providers of such managed care cover 19% of insured patients nationally. Penetration rates run much lower in Healthsource's eight-state market, including South Carolina (3%), Maine (4%), Tennessee (6%) and North Carolina and Indiana (both 7%). The result: feverish enrollment growth of 37% last year (vs. 7% for HMOs overall) followed by projected '94 gains of 20%, more than double the norm. Pilgrim is counting on profits rising 39% over the year to June 30, then another 33% next year. Sbarro (SBA). This $245 million chain of 607 cafeterias Italiano has served up fatter sales and earnings every year since its stock's 1985 debut at $3.46 a share (vs. $38 lately, an elevenfold gain). Yet Pilgrim says many Wall Streeters swore off the Commack, N.Y. firm in the first half of '92, when the lingering recession stymied Sbarro's expansion, depressing profits 19% and the stock 58% to as low as $21. In response, the Sbarro family (owner of 44% of the stock) quickly slashed costs to rekindle earnings growth, which Pilgrim expects to rise 37% annually by midyear, then 33% over the next four quarters.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: FIVE PINT-SIZE PROFIT MACHINES These firms' earnings per share (EPS) growth -- a key gauge of a stock's potential appreciation -- could average 45% by mid-1994, double Pilgrim's market forecast.