Eaton Vance's search for 'unloved' stocks

Nancy B. Tooke, the third manager of Eaton Vance Corp.'s Tax Managed Small Cap Growth Fund since 2003, is turning the fund around after a six-year slump.

The fund ranks first this year in its class of 235 competitors after rising 17 percent, data compiled by Bloomberg show. Tooke, 60, revived performance by investing in what she calls "unloved, undervalued" companies such as seismic-data designer Input/Output Inc. and ball-bearings-maker RBC Bearings Inc. Shares of Input/Output surged 67 percent in the last year, and RBC Bearings advanced 54 percent.

"I'm an addict in small-cap investing, so if you do your research right, you can always find 80 good names," which is the number of stocks in Eaton Vance's $125 million mutual fund, Tooke said in an interview at her office in Boston.

Small Cap Growth fell at an average annual pace of 4.2 percent under Toni Shimura and Edward E. Smiley in the five years before Tooke's appointment. The Standard & Poor's Smallcap 600 Index, the fund's benchmark, rose at a 12 percent rate in the same period.

Tooke joined Eaton Vance in February 2006 after overseeing client accounts at ForstmannLeff Associates L.L.C. and Wertheim Asset Management. Her investing career began in 1969 when she joined Brown Brothers Harriman & Co. in New York.

Tooke, who started tracking the small-cap market in 1989, said she buys companies whose shares trade at a discount to their peers and have the potential to accelerate earnings growth. The average price-to-earnings ratio of stocks in Small Cap Growth was 20.6 at the end of March, compared with 23.4 for the S&P Smallcap 600 Index.

The fund has an average three-year Sharpe ratio of 0.82 versus 0.61 for its peers, according to industry research firm Morningstar Inc. in Chicago. A higher ratio means better risk-adjusted returns. Morningstar gives Small Cap Growth two stars out of a possible five.

Tooke's five biggest holdings at the end of March were Jarden Corp., the Rye, N.Y., maker of camping and outdoor equipment such as Coleman grills; Terra Industries Inc. of Sioux City, Iowa, which makes liquid-nitrogen fertilizer; Central European Media Enterprises Ltd. of Bermuda, the owner of television networks in the Czech Republic and five other eastern European countries; database-software company Sybase Inc. of Dublin, Calif.; and Baltimore-based FTI Consulting Inc.

Energy and industrial companies that are less vulnerable to lower commodities prices and a slowing U.S. economy are among the best investments, said Tooke, a graduate of Smith College in Northampton, Mass. The U.S. economy had its worst performance in four years during the first three months of 2007.

Shares of Input/Output soared 94 percent last year, the top performers on the Standard & Poor's SmallCap Oil and Gas Equipment and Services Index, after the company received a $60 million contract from India's Oil & Natural Gas Corp. It rose an additional 13 percent so far this year. The stock fell 20 percent in 2005 after the Houston-based company reported three consecutive quarterly losses.

Even if crude-oil prices plunge, Input/Output "would be in a sweet spot in terms of earnings because the search for oil and energy is widespread across the world," said Joseph Zock, who helps oversee $7 billion at Tocqueville Asset Management of New York and holds about 309,000 shares of the company.

Shares of RBC Bearings of Oxford, Conn., the fund's sixth-biggest position, rose 76 percent in 2006 and 35 percent so far in 2007 as demand for precision bearings increased from the aerospace and defense industries. The stock advanced 6.4 percent in 2005, when the company had an initial public offering.

Not all of Tooke's investments have paid off. Shares of Aber Diamond Corp. and Herbalife Ltd. are little changed this year.

Aber Diamond owns Harry Winston jewelers, and Herbalife in the Cayman Islands sells nutritional supplements and personal-care products. Tooke said investors have overlooked the companies' prospects from planned expansions in Asia.

"If the stock is undervalued, you want to look for catalysts because you don't want to own the stock, and no one is coming to the party," Tooke said.

The average earnings increase for members of the S&P Smallcap 600 Index was 4 percent in the first quarter, or one-third as much as companies in the S&P 500, Bloomberg data show. Shares of large-company stocks are outperforming this year, with the Dow Jones industrial average gaining 9.5 percent, compared with the S&P Smallcap 600's 9.1 percent increase.

Eaton Vance's fund is tax-managed, meaning it tries to limit capital-gains distributions by taking losses to offset them. In addition to the fund, Tooke has started managing money for institutional clients since joining Eaton Vance.

Fund manager: Nancy B. Tooke.

Assets under management: $125 million.

Performance: Up 30 percent in the last 12 months.

Significant holdings: Jarden Corp., Terra Industries Inc., Central European Media Enterprises Ltd.

Ticker: ETMGX.EndText