Sam Dearborne, Investment Advisor, St. Gramercy Investments

Comments and Outlook

We believe that bonds will come under pressure this year as central banks tighten monetary policy to combat inflation. This makes equities the asset class of choice in 2011.

Earnings for the S&P 500 could grow by as much as 15 percent this year, driven by both improving domestic demand and strong demand from emerging markets. Although investors should have exposure to US markets, they should also allocate about 15 percent of their portfolio to emerging markets to take advantage of strong overseas growth.

Recommended Strategies

We are focused primarily on the materials, technology and healthcare sectors because those three stand to gain the most from a continuing economic recovery. The lingering worries over sovereign debt in peripheral European countries and the turmoil in the Middle East may provide attractive entry points into quality names.

What to Buy Now

We’re paying attention to Israeli companies as concerns mount over the riots in Egypt and Tunisia. Fears of a shift in the balance of power in the region have prompted a selloff in Israeli stocks. These concerns are largely overblown.

Elbit Systems (NSDQ: ESLT) is a diversified defense conglomerate that provides electronic upgrades for military aircraft and helicopters and also trains flight crews. The company also produces unmanned aerial vehicles and command, control, communication, computer, information surveillance and reconnaissance (C4ISR) systems. C4ISR encompass all the systems that allow global militaries to fight modern wars.

Elbit’s stock hasn’t reached bargain levels. But the situation in the Mideast has led to an 8 percent decline in the company’s shares, which makes for an attractive entry point. A conflict in the region would be a boon for Elbit’s earnings.

Teva Pharmaceutical Industries (NSDQ: TEVA) is an Israel-based drug manufacturer whose shares are well off their 2010 highs. The company is the world’s largest maker of generic drugs with operations in more than 60 countries.

Trading at a price-to-earnings ratio just over 17 and with average three-year revenue growth of 18 percent, Teva is a bargain by historical standards. About $150 billion worth of name brand drug sales will come under challenge from generics over the next several years as patent protections expire. That’s a huge opportunity for Teva.

Duilio Ramallo  Portfolio Manager  Robeco Boston Partners All Cap Value Fund (BPAVX)

Comments & Outlook

Current market levels are consistent with the S&P 500’s long-term annualized return average of 8 to 10 percent. We’re in the midst of a strong corporate earnings recovery and revenue growth has been modest so far. Markets aren’t expensive on an earnings basis and free cash flow generation has been very strong. In the near term, we anticipate there will be market volatility due to unresolved global macro issues stemming from the European sovereign debt crisis, US federal and state budget deficits, sharply fluctuating commodity prices and global political instability, primarily in the Middle East.

Recommended Strategies

We build the portfolio stock by stock from the bottom up. We identify businesses that are inexpensive relative to their own growth and profitability profile, and also generate high, sustainable returns on capital. We also look for companies that have a catalyst in place to unlock value over time.

Our fund is unrestrained in terms of market cap, so we take advantage of stock-specific opportunities throughout the market. The portfolio’s market cap profile is dynamic and currently tilted toward large-cap stocks. We have the opportunity to buy higher-quality companies at relatively attractive valuations. These companies that have the financial wherewithal and competitive advantages to create value for shareholders during what will probably be a bumpy recovery. 

What to Buy Now

One of the largest independent oil and gas exploration and production companies in the US, EOG Resources (NYSE: EOG), has a strong balance sheet, a disciplined management team and competitive asset base. Data points regarding the quality of Eagle Ford field continue to improve. EOG Resources is transitioning from gas to more of an oil-focused business, a process that could potentially unlock value over time.

Family-oriented department store Kohl’s Corp (NYSE: KSS) has managed inventory well, appears to be experiencing a pick-up in traffic and has branched out with exclusive offers to help expand margins. Kohl’s is a good free cash flow generator that may also unlock value by returning cash to shareholders.