Most analysts expect a strong stock market performance in 2013. In fact, many predict that the S&P 500 will finally break above 1,600. Amid such bullish sentiment, lower-quality companies could start getting a lot of play in both the financial media and the market itself. As performance expectations rise, investors’ tolerance for risk tends to stretch. However, Eric Schoenstein, part of the team that runs Jensen Quality Growth (JENSX, 800-992-4144), believes stocks still face some headline risk and investors should therefore continue to focus on companies with strong fundamentals. For JENSX, that means companies that have generated returns on equity of at least 15 percent over the past 10 years, boast solid balance sheets, and offer attractive growth potential.

What’s your outlook for 2013?

I think there is the potential for a disconnect between headline risk and performance in the markets. Despite the ongoing political uncertainty over budget negotiations, many individual stocks have posted strong gains.

That’s important to keep in mind since the same nonsense will continue to garner headlines until Congress addresses the sequestration side of the fiscal cliff in March. The conventional wisdom is that Republicans will press for budget cuts, while Democrats will push for more spending. The next political showdown will generate a lot of headlines; the challenge is to ignore all the noise from the media and focus on the long-term growth potential of fundamentally sound businesses.

There’s also opportunity arising from a strengthening US housing sector and an improving global economy. The US economy will probably continue to be self-sustaining, partly because of lower energy prices thanks to the discovery of abundant domestic sources of energy.

And while many investors have been concerned about whether profit margins are too high, I think there’s still room for margins to expand further. Innovation will drive productivity enhancements as well as systemic changes, such as the budding manufacturing renaissance.

At present, we’re cautiously optimistic. Despite the market’s ever-present wall of worry, stocks have proved remarkably resilient over time. There have always been periods of excessive investor enthusiasm that led to bubbles that subsequently deflated. And the media fixates on one crisis after another. History offers numerous examples of these events, such as the recessions in the 1980s, the Y2K problem that was supposed to lead to widespread computer failure, and the bursting of the technology bubble, among others.

But even after the worst downturns, the market has always come back to reach new highs, and well-run companies with strong fundamentals are generally among the best performers.

Although we’re in a period where returns have been choppy, history shows that from a long-term perspective, equities are one of the best tools for wealth creation.

What are your favorite sectors for 2013?

One sector we continue to be positive about is technology, since it plays a significant role in helping businesses increase productivity. Companies are willing to invest in new technology even when money is relatively tight because it keeps operations performing at peak efficiency.

As I’ve already pointed out, many people are concerned about margin compression, but I think many businesses will maintain margins by cutting costs through greater use of technology.

One of the ways to improve efficiency is through enterprise resource planning (ERP) systems, which manage supply chains, inventory or distribution. Companies also use business process outsourcing (BPO) to contract out inefficient processes to third parties, which leaves them able to focus on the operations they do best.

ERP systems can be difficult and time-consuming to put into place, so companies use firms such as Accenture (NYSE: ACN) to help with implementation. Accenture has the technology and expertise to ensure the process goes well, and it can also assist with outsourcing initiatives.

We’ve also got some exposure to a much smaller version of Accenture called Cognizant Technology Solutions Corp (NSDQ: CTSH). Additionally, we hold companies such as Oracle Corp (NSDQ: ORCL) and Microsoft Corp (NSDQ: MSFT), which are primarily known for traditional software and hardware, but are becoming increasingly involved in cloud computing.

While I’m leery of the effects of healthcare reform, demand for healthcare is growing around the world. So I think there is real opportunity for businesses that can offer greater efficacy or cost efficiencies to managed care or hospital purchasing organizations.

Abbott Laboratories (NYSE: ABT) is an example of a company creating cost efficiencies on a global scale. It just completed a spinoff of its legacy pharmaceutical business and is now focused on nutritionals and diagnostics. Abbott also retained its branded generic pharmaceuticals division, which is enjoying rapid sales growth around the world, particularly in the emerging markets, where consumers can’t afford traditional branded drugs. Branded generics cater to a situation where the purchaser understands the power and efficacy of a branded product but wants to pay generic prices. Over the past few years, Abbott has been expanding in this space via acquisitions.

Becton Dickinson & Co (NYSE: BDX) has managed to expand its surgical tool empire in Europe despite the Continent’s ailing economy. The company produces safety needles and syringes that help prevent accidental needle sticks. The use of such products is now mandatory in most US hospitals, and EU regulators are following suit by requiring greater use of them. That should help the firm achieve similar market penetration in Europe as it has in the US. So there’s a tailwind for growth.

Given your positive outlook on the economy, why doesn’t your portfolio have more exposure to consumer discretionary names?

It’s tough to find companies that meet our criteria in this space because of the volatility in their earnings and growth. We want businesses that are consistent and less susceptible to the whims of consumers.

There are some sectors that don’t work for us because they can’t produce companies that grow their profits consistently or control their end markets. In such situations, it becomes much harder to count on business performance. For that reason, we typically steer clear of sectors such as energy, utilities and telecoms.

Although they produce stretches of outperformance, these sectors can occasionally shock investors when patterns of supply and demand suddenly shift. For example, the price of oil was riding high in an incredible bull market until mid-2008. The same thing happened to natural gas. That very speculation is something we attempt to avoid because it’s unpredictable and adds a great deal of risk that can’t really be mitigated through solid research.

That said, we do hold Nike (NYSE: NKE) and have been very pleased with its performance. While it operates in the consumer discretionary sector, it’s created a brand that people want to buy regardless of their circumstances. Nike offers such a broad array of athletic wear and has done such a stellar job at marketing that it’s basically become ubiquitous within American culture.

What is your best advice for investors over the next year?

There’s room for optimism: Don’t give up on equities. Do your research and make an investment plan, then stick to it. Keep a long-term perspective and don’t be swayed by shortterm events such as a one-time earnings miss or a piece of bad news. With regard to the latter, I suspect there will be quite a bit of that over the coming year.