George A. Mairs III of Mairs & Power Growth Fund

The fund, which holds only a handful of stocks and features many Minnesota-based companies, lost 12.4% in the third quarter just ended, and 14.4% for the first nine months of the year. But that put it ahead of its peer large-cap growth funds, which were off 16.2% on average in the third quarter, and 31.2% in the first nine months.

The Full Interview:

Mary Richards was last seen in Minneapolis in 1977, three years before George A. Mairs III began managing Mairs & Power Growth fund in neighboring St. Paul.

The portfolio that he oversees doesn't own many companies, and the bulk of them, particularly those that aren't giants, can be found in his own Twin Cities backyard.

"We will not look outside this area for either small or mid-cap stocks because we feel we have to be able to visit with management periodically," Mairs says, adding that he thinks there are enough good investments locally to provide adequate diversity. About 65% of his holdings are headquartered where the Vikings play their home games, according to Mairs.

Moreover, Mairs says he's found that Minnesota-based companies tend to be successful thanks to unique products or strong franchises, which can give them the competitive edge needed to generate the kind of earnings he likes to see.

To get Mairs interested, a company must demonstrate the ability to consistently fatten its bottom line by at least 10-12%. Because they tend to lack the growth he desires, Mairs says he tends to avoid cyclical companies and utilities. Since he doesn't want to pay too much for stocks, Mairs prefers those whose valuations are no more than double their earnings growth rates.

In order to facilitate research, only about 35 stocks make their way into the $750 million fund. Mairs is willing to own companies of any size, but "the lion's share of the portfolio has always been" invested in large-caps, he says.

A recent addition to the portfolio is Genl Electric (GE), which Mairs began buying in the spring when it looked like a bargain to him. The stock's current price-to-earnings ratio of about 13.6 is lower than he's seen it in a decade, Mairs says.

Some of the conglomerate's businesses, like its jet aircraft unit, have been hurt by the weak economy, Mairs acknowledges. However, he says he is drawn to the company's medical products business, which produces diagnostic equipment, because of its high margins and its leadership in the growing industry.

Mairs began investing in drug maker Merck & Co (MRK) in late 2001 and added more shares this year because they seemed inexpensive. The stock is trading for about 14.5 times projected earnings this year, and about 13.5 times earnings expected in 2003, he says. Also, Merck's research and development efforts are the "most productive" of any of the large pharmaceuticals makers, he says.

Health care stocks like Merck account for about 22% of the fund's assets, its largest industry holding. Mairs envisions these companies benefitting as populations age worldwide and need more drugs and medical services.

The No. 1 holding in the portfolio is Medtronic, Inc (MDT), which makes medical devices like pacemakers and insulin pumps. Mairs likes Medtronic's ability to grow internally and externally by introducing its own new products, and through acquisitions. Medtronic's 17% growth rate is tops among the fund's stocks, Mairs adds.

Another of the fund's investments in the sector is Johnson & Johnson (JNJ), which Mairs says has been his best performer in the group so far this year. The stock has dropped about 4.9%, compared to a loss of 32% by the Standard & Poor's-500 stock index, he notes. Mairs is upbeat about the company because of its diverse product line, which includes consumer products like band aids and baby shampoo.

Banks and financial stocks make up about 18% of the portfolio. Mairs reasons that these companies will grow as incomes increase and people need more investment services.

His largest holding among these businesses is Wells Fargo (WFC). "They have a whole variety of products they can offer to clients," which gives Wells "probably a more diverse revenue stream than any other banking company in the U.S. today," Mairs says.

The fund's second-largest holding, and one of Mairs's Minneapolis-based favorites, is retailer Target Corp (TGT). Although the chain is smaller than rival Wal-Mart Stores (WMT), its profit margins are "quite comparable" to that company, he says.

When it comes to selling, Mairs will remove a company from the fund if its financial fundamentals start to erode, or the stock becomes too pricey. However, he doesn't do much wholesale trading. "In a typical year, we will add about two names, and we will also eliminate about two names," he says.

In the first quarter this year, Mairs completed selling his shares of Weyerhaeuser Co (WY), which he started shedding in late 2001 because the stock had gotten ahead of itself, he says. Despite his distaste for companies whose fortunes depend on the strength of the economy, Mairs said he bought the company, which grows trees for the production of wood and paper products, about two years ago because it was cheap.

Looking at stocks overall, Mairs believes they can rise at least 10% by the end of the year. He bases that on his outlook for the economy, which he thinks can expand by 3%, which "isn't bad at all." In addition, he feels valuations right now are "compelling."

"We would guess that we're very close to the bottom of the market, and therefore the end of the bear market," Mairs says.