Ronald Muhlenkamp is sticking with the home-building and financial stocks that helped his Muhlenkamp Fund gain 48 percent last year, even after the Federal Reserve said this month it would boost borrowing costs.

"The stocks are cheap, based on people's fear of rates going up," Muhlenkamp, 60, said in an interview from his office in Wexford, Pa., 19 miles north of Pittsburgh.

Muhlenkamp said that he picks stocks the way he buys cars and that he'd "rather own a 10-year-old Porsche than a new Chevy." The approach has helped his $1.2 billion Muhlenkamp Fund produce annualized returns of 15.4 percent in the past 10 years. That exceeded the 11.4 percent advance of the Standard & Poor's 500-stock index in the same period.

This year Muhlenkamp's fund has dropped 3.4 percent. The fund has about 40 percent of its assets in stocks hurt by rising rates, including home builder Centex Corp. and Countrywide Financial Corp., the No. 2 U.S. mortgage lender. Shares of Centex have fallen 21 percent since March 5 on concern that higher rates will mean fewer home sales.

Muhlenkamp said he remains optimistic about the outlook for Centex because the Dallas-based company is taking business from smaller builders, partly because it's more successful at getting building permits from local governments. The stock trades at less than seven times this fiscal year's profit estimate. The average price-to-earnings multiple for companies in the S&P 500 is 17.

Countrywide Financial of Calabasas, Calif., is using the Internet to make loans and bulking up its commercial bank to increase earnings, Muhlenkamp said. Shares of Countrywide trade at less than eight times 2004 earnings estimates.

Muhlenkamp's fund has gained at an annual rate of 8.9 percent during the past five years, ranking 12th of 68 "value" funds tracked by Bloomberg. The top performer was the $245 million Al Frank Fund, which climbed at an annual pace of 20.5 percent. The S&P 500 fell 2.3 percent a year in the same period.

Value fund managers look for stocks they consider cheap relative to earnings, book value and other financial yardsticks.

Muhlenkamp expects the Fed to raise the overnight bank-lending rate to at least 2 percent from the current 45-year low of 1 percent. He said he won't get concerned unless mortgage rates climb another 1.2 percentage points to 7.5 percent. Rates were last that high in 2000.

Muhlenkamp finds stocks by looking at a company's price-to-earnings multiple and return on equity. The latter is calculated by dividing net income by shareholders' equity, or net worth.

The 50 biggest companies in the S&P 500 by market value return an average 20 percent and trade at 20 times expected earnings, he said. Muhlenkamp's average stock trades at 14 times expected earnings and has a return on equity of 18 percent.

Muhlenkamp holds 1.4 million shares of Centex. Centex's return on equity for the fiscal year ended March 31 was 29 percent, and the shares trade at 6.4 times the $6.81 a share that analysts expect the company to earn in the current fiscal year.

Countrywide's return on equity was 36 percent last year, and its shares trade at 7.5 times analysts' 2004 earnings estimates.

Too many investors focus only on mortgage refinancing when they analyze Countrywide, said Muhlenkamp, who holds 1 million shares of the company. "They have more tricks than that," he said.

When Muhlenkamp bought shares of Centex and builders NVR Inc. and Meritage Corp. in 2000, they traded at four times earnings, he said. They're still among his 10 biggest holdings, along with Countrywide, Fidelity National Financial Inc., the largest U.S. title insurer, and Fannie Mae, the biggest buyer of home loans.

Muhlenkamp, who earned a master's degree from Harvard Business School after graduating from the Massachusetts Institute of Technology, started managing other people's money in 1968 when he worked as an analyst at Berkley Dean & Co. in New York. He started his own investment firm nine years later and opened the Muhlenkamp Fund in 1988.

In the first quarter, the fund purchased shares of Johnson & Johnson. The world's biggest medical device maker returned 29 percent on equity last year. The stock trades at 18 times this year's analyst estimates.

Muhlenkamp said one of his mistakes has been holding on to shares of El Paso Corp., a U.S. pipeline owner and natural gas producer. He first bought the stock at prices "in the thirties" in 2000 and he held them as they rose to a high of almost $74.

In 2002, El Paso lost $1.47 billion as a unit that traded energy contracts collapsed. He said he now realizes he failed to comprehend the extent of the problem. The stock closed at $6.90 on Friday.

Muhlenkamp holds stocks in his fund for seven years on average. That compares with an industry average of less than two years, according to the Investment Company Institute.