Susan M. Byrne, who started buying energy producers for her Westwood Equity Fund in 2003, said she is staying with the stocks because they would still be cheap even if oil falls by 50 percent from last week's record.

"People are obsessed about what will happen with the price of oil, and whether you should sell the stocks or hold them," said Byrne, 59, in an interview from her office at Dallas-based Westwood Holdings Group Inc. "These stocks have little downside risk."

Byrne has 18 percent of her fund's assets in oil and gas companies, including ConocoPhillips and Burlington Resources Inc. That proportion exceeds the oil and gas group's 10 percent weighting in the Standard & Poor's 500-stock index.

Energy stocks are the best performers in the S&P 500 this year, gaining 34 percent on average. The rally was buoyed by crude oil futures, which doubled to more than $65 a barrel in New York during the past two years.

The $183 million Westwood fund rose at an annual rate of 2.9 percent in the past five years, ranking in the top fifth of 227 funds tracked by Bloomberg that invest in so-called growth stocks.

The S&P 500 dropped an average 2.2 percent a year in the period. Byrne's fund is up 11 percent in 2005, trailing the 16 percent advance of top-performer Bridgeway Aggressive Investors 2 Fund.

Byrne, a California native, got her first job in 1970 as a secretary at E.F. Hutton & Co. in New York and later became an analyst at the firm. She then got into the money management business at Bankers Trust before founding her own firm in 1983.

Starting her career in the 1970s, when oil-price shocks led to soaring inflation, recession and a stagnant stock market, taught her to consider risks before returns, she said.

She develops worst-case scenarios for stocks and buys those she sees as undervalued and therefore cushioned from declines.

With help from 12 analysts, Byrne scans for shares that have a risk-reward ratio of 1 to 3, measured by the "worst-case" level compared with her target price based on free cash flow and earnings.

She focuses on free cash flow, or profit from operations minus capital expenditures, because that's what supports the company's ability to grow, Byrne said.

She estimates that less than 50 percent of the stocks they look at meet the risk-reward standard.

"We never start with what's the best outcome because the best outcome will take care of itself," Byrne said. "Our first thought is about the downside risk."

Shares of ConocoPhillips, the No. 3 U.S. oil company, have doubled since 2003, and shares of Burlington Resources have more than doubled. Both companies are based in Houston. ConocoPhillips closed Friday at $69.02 a share while Burlington Resources ended the week at $76.28.

With the market rally, Byrne's team has reevaluated those investments, analyzing what cash flow and earnings would be next year with oil prices at $32.50, $45 and $55 a barrel, and natural gas in an equally wide range.

Byrne said her energy holdings would trade for about six times 2006 cash flow if crude prices average $32.50 a barrel next year and natural gas averages $4 per million British thermal units. That's in the middle of the four-to-10-times range of the past 30 years, Byrne said.

If the average oil price exceeds $55 a barrel next year and natural gas is more than $7 per million BTUs, well below current levels of $65.78 crude and $11.31 natural gas, then the stocks sell at four times cash flow, which is "ridiculously cheap," she said.

Money manager George Schwartz disagrees.

"My view is the price of these stocks is going to come down with the price of oil, even though the earnings will still be good," said Schwartz, who manages $650 million at Schwartz Investment Counsel Inc. in Bloomfield Hills, Mich.

Byrne also has a large bet in financial services companies including Franklin Resources Inc. The sector was the fund's largest group at 19 percent of assets as of June 30, slightly less than the industry's 20 percent weighting in the S&P 500.

She added shares of San Mateo, Calif.-based Franklin Resources, manager of the Franklin and Templeton mutual funds, during the fourth quarter of last year because its profits are tied to assets, not interest rates.

Franklin's fiscal third-quarter earnings surged 51 percent from a year earlier, buoyed by an increase in the firm's international fund business.

The company's stock has gained 18 percent this year and closed Friday at $82.93. Only shares of Legg Mason Inc., a Baltimore-based money manager whose shares Byrne also owns, have gained more among the 19 stocks that make up the SIG Investment Managers Index.

Byrne bought Franklin shares for about $60. Her three-year target is $125 and the "worst-case" drop is $72, she said.

All of her personal money is invested at Westwood, which now manages $4 billion.

Despite her stock-picking success, Byrne said she tries not to let it go to her head.

"They have a saying that the whale that spouts the highest is the first to get harpooned," she said. "When you allow any hint of smarty-pants to come into your work, you're cruising for a bruising."