COSTA MESA — James E. Mitchell is a buttoned-down, old-fashioned businessman who makes his living in an unorthodox way. From the 11th floor of a Costa Mesa office building, he manages one of

the few portfolios in the country devoted exclusively to stocks traded in the “pink sheets,” long considered the dogs of Wall Street. It’s not for the faint of heart. The pink sheets are

where new companies start out and where slow-growing companies can languish. They are where failure is more common than success and where a company’s performance can remain lackluster for

years with little pressure from shareholders to improve. They are the basis of a market where public disclosure is nearly nonexistent, where unscrupulous investors and brokers can manipulate

traded. But there are opportunities for bigger gains than in listed stocks.” Among more than 3,000 investment funds nationwide, fewer than 25 put half or more of their assets in pink sheet

stocks. And less than 15 brokerages have established a reputation as pink-sheet dealers. Mitchell, 54, has found those gains for himself and his private investment company, Mitchell

Partners. He has reaped windfalls mostly on such little known companies as San Diego Financial Corp., which he bought at $83.125 a share and sold in a buyout eight years later for $756.10 a

share. But he also has profited on more well-known operations such as Eskimo Pie Corp., which he bought at $3.20 a share and sold 19 months later at $21.25 a share when the ice cream maker

went public. “For those who want to be in this market, it’s a fertile field,” Mitchell said. His strategy is to avoid true “penny” stocks, the ones with few assets but big dreams based on

intangibles such as mineral rights and patent claims. Instead, Mitchell and a few other value-oriented professional investors who mine this market are attracted to the wealth of old-line but

little-known companies whose stock prices are published daily--on pink sheets--by the National Quotation Bureau. Many are worth a lot--he’s paid as much as $90,000 a share for sink and tub

maker Kohler Co.--though most are semi-private. Often they have less than 500 shareholders and are run by secretive managers who shun the visibility and disclosure rules of major stock

exchanges. Mitchell patiently culls the pink sheets listing of about 10,000 companies for jewels at bargain prices. He makes investments knowing that he must often bide his time before

taking his gains in a merger, acquisition or buyout. From his bare-bones office, the onetime lawyer maintains files on several hundred thinly traded companies. Without benefit of computer

programs or charts of technical indicators, he researches target companies by exchanging information with like-minded investors and brokers. His portfolio of 200 companies was winnowed from

about 1,000 that responded to his requests for financial information. “This is the exact opposite of the scam companies that bury you in paper,” Mitchell said about the way he gains

information. “The companies we’re interested in, it’s hard to get anything out of them.” Mitchell remains generally a passive investor, unless management attempts to freeze out minority

shareholders with tactics he describes as unfair. However, Mitchell Partners has joined with other dissident shareholders five times to sue management. Three cases were resolved and two are

pending. Among the targets he finds attractive are century-old companies where the stock, once tightly controlled by family members, has been distributed to employees and grandchildren whose

loyalties to the business are not as strong. For instance, in 1988, Mitchell bought stock in towel maker Dundee Mills in Griffin, Ga., paying $821 a share. He later paid as much as $1,825

for Dundee stock. He expects to take his profit soon because in January a member of Dundee’s founding Cheatham family agreed to another textile firm’s offer of a $120-million buyout--or

$2,500 a share. Mitchell Partners still owns five shares. “We like management that still owns a lot of shares,” Mitchell said. “Companies are managed more for shareholders when management

has something at stake.” Securities experts say Mitchell’s value-driven strategy is unusual among managers of private investment pools, and inherently a bigger gamble for investors and

regulators. Purchases by a single buyer can drive prices up or down easily and can make a stock a takeover target, said John R. Perkins, Missouri’s former securities commissioner. “You can

affect prices very dramatically.” How a manager of an investment pool buys and sells pink sheet stocks tells a lot about whether the pool is legitimate or trying to profit by moving the

market, Perkins said. “The right answer is to buy and hold,” he said. Specializing in obscure companies can try the patience of Job. It is far from Wall Street’s fast-paced, quick-profit

ethic. “It takes a certain mentality,” said Jack Rubens, president of pink sheets trader Monroe Securities in Rochester, N.Y. “It’s a slow road.” He said that Mitchell is one of only a few

investors who buy pink sheet stocks on a national basis. Most are regional investors, who typically seek shares of a local company. Mitchell now divides his time between homes in Irvine and

Pacific Grove, near Monterey. He grew up in Garden Grove, and made his first profit--a few hundred dollars--when he was 12 by investing in a nascent television network known as ABC

Paramount. Once a practicing lawyer, he began Mitchell Partners 15 years ago with $500,000 of his own money and $190,000 from six partners. His seed money came from the proceeds of the 1979

buyout of Century 21 Realty, which he helped to found and where he worked as general counsel. The fund’s initial focus was risk arbitrage, a well-known and still popular strategy of buying

stock in companies that are in takeover situations. Mitchell shifted to his present pink sheet emphasis in the early 1980s as arbitrage became less lucrative. “I noticed a number of our

investments made in small unknown companies were unusually profitable,” he said. Mitchell Partners has since grown to 38 partners and $13 million in investments, with an average annual

return of 14%. Last year, the fund returned 7.1%, while the Standard & Poor’s index edged up just 1.3%. “So far, it’s worked,” said pool investor C. Chester Brisco, a Tustin labor

relations arbitrator and former law partner of Mitchell. He estimates that 40% of his assets are committed to the fund. Mitchell caters to an exclusive group of wealthy clients. Like most of

the 3,000 private investment funds nationwide, Mitchell Partners requires a hefty minimum investment--$50,000 in its case. Investors must give Mitchell a year’s notice to withdraw funds,

and new investments are permitted only once a quarter. MORE TO READ