NEW YORK – Up 38% in the last three months of 2001, the Russell 2000 Growth Index has sagged 12% so far this year. But William A. Muggia, co-manager of the Touchstone Emerging Growth Fund ($180 million assets), remains bullish on small and mid-cap growth companies, which he says are cheaper than those with large market values.

Quintiles Transnational (nasdaq: QTRN – news – people ), a clinical research and consulting services company for the drug, biotechnology and medical device industries, is one of Muggia’s picks. He thinks the company has several items working in its favor, notably new management, recent cost-cutting measures, a likely increase in genomics-related research and the fact that several high-volume prescription drugs sold by rival firms are coming off patent.

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NEW YORK – Consolidation was kind to shareholders of American Water Works. Last September, the company announced an offer from Germany’s RWE to purchase outstanding American Water shares at $46 each, a 35% premium to their closing price just prior to the offer.

Are more such acquisitions in store for the U.S. water business? Yes, according to Hans Peter Portner, manager of the Pictet Global Water Fund. The fund invests in companies with at least 20% of revenue derived from water activities: production, services and related technologies.

Portner sees two forms of consolidation on the horizon. The first is a trend toward privatization of America’s 55,000 community water systems. The most likely model, he contends, will be “public-private” partnerships between municipalities and leading water companies such as Suez (nyse: SZE – news – people ) and Vivendi Environnement (nyse: VE – news – people ).

This model has taken hold in Europe, and Portner sees a fit for the United States. He argues that municipalities will need private water companies’ financial muscle to upgrade community water infrastructure. His assertion finds support in estimates by the American Water Works Association, which foresees a need for $325 billion in capital spending on water distribution over the next 20 years.

Second, Portner thinks water giants will also snap up midsized companies that provide water-related technologies such as membrane filtration, ultraviolet-light disinfection systems, and consulting and engineering services.

So how to spot the likely targets? One means is the enterprise multiple, or the ratio of a company’s enterprise value divided by its earnings before interest, taxes, depreciation and amortization. Enterprise value–the sum of a company’s market capitalization and total debt, minus cash and marketable securities–makes a good proxy for the minimum price an acquirer must pay.

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Relative value managers, such as Linell McCurry of Walnut Asset Management, keep their value bias, but they pick stocks that would make a Ben Graham purist blush.
Conjure up a typical value stock, and Biogen doesn’t exactly leap to mind. Shares of the biotechnology concern sell for 8 times trailing revenues and 29 times trailing earnings. Analysts reporting to Thomson Financial/IBES expect Biogen’s profits to increase 18% (annualized) over the next three to five years. This doesn’t look like a stock shunned by Wall Street.

But consider Biogen (nasdaq: BGEN – news – people ) relative to its peers. The biotechnology stocks with market capitalizations exceeding $1 billion in the Market Guide database sell for an average of 74 times latest-12-month earnings. Limit the universe to biotech stocks bigger than $5 billion in capitalization, and the average multiple is still a rich 67. Alongside competitors, Biogen looks cheap.

Finding such “bargains” among high-multiple stocks is the domain of the relative value investor. “There are whole areas of the market that people will miss if they’re looking for just low price-to-book multiples and low P/Es,” says Linell McCurry, portfolio manager with Walnut Asset Management, a Philadelphia firm managing $700 million.

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NEW YORK – Debt isn’t evil. Prudent companies issue bonds to help pay for new plants and equipment, and invest in new products. But excessive debt can put enormous pressure on cash flow–particularly during an economic slowdown. In the current business environment, a good case can be made for investing in companies that aren’t excessively burdened with debt.

Example: BJ Services (nyse: BJS – news – people ), an oil-field services company. Over the past four quarters, the Houston-based firm has reduced its long-term debt from $142 million to $79 million. BJ Services’ long-term debt stands at just 5.4% of its total capitalization, versus a 28% average for an S&P index of industry peers.

With debt at such a manageable level, BJ Services should be able to ride out the current weakness in energy prices, particularly natural gas. Nevertheless, the decline in fuel prices has helped drive down BJ Services’ stock, which is off 33% from its 52-week high.

Shares of BJ Services sell for 14 times latest 12-month earnings, and 20 times estimated profits for the coming 12 months. The 12-month forward price-to-earnings ratio for the S&P 500: 31.

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