Planting the Seeds for Big Gains

Mutual Funds

Planting the Seeds for Big Gains

Appleseed Fund goes almost anywhere to find cheap, high-quality stocks.

When market indexes flounder and flop, it pays to look nothing like an index. That strategy has certainly worked for the Appleseed Fund (symbol APPLX). Its concentrated, 20-stock portfolio runs the gamut from the bluest of blue chips to the most minuscule of micro-cap stocks. Even more impressive than Appleseed's stellar one-year return is its performance from the start of the 2007Ð09 bear market: The fund gained 1.4% from October 2007 through August 7, while Standard & Poor's 500-stock index, even after its recent surge, tumbled 32.5%.

Appleseed's investment process combines a search for deeply undervalued stocks with a social-responsibility theme. The five managers cast a wide net for ideas, but to make it into the portfolio a stock must look cheap relative to the free cash flow the company generates and trade for at least one-third less than their estimate of a company's value. Moreover, Appleseed's managers won't consider any company that deals in tobacco, alcohol, gambling, weapons or pornography.

John B. Sanfilippo & Son (JBSS), Appleseed's third-biggest holding, exemplifies the team's approach. With a market value of just $90 million, Sanfilippo is the second-largest U.S. nut producer, behind Planters. But a series of short-term issues, such as high nut prices and a move to consolidate manufacturing centers (not to mention the bear market), caused the stock to plunge from $52 in 2004 to $4 in late 2008. At that point, "we backed up the truck," says Josh Strauss, one of Appleseed's managers.