05/10/2010 05:12 am ET Updated May 25, 2011

Pros Peg Best, Worst Stocks

On May 6, 1954, an Englishman, Roger Bannister, achieved one of the great sports feats, running a sub 4-minute mile in three minutes and 59.4 seconds. Lo and behold, a beaten up stock market, in its own way, has also posted a version of the four-minute mile by climbing out of the sewer and rocketing, as measured by the S&P 500, nearly 70% over the past year from its March 9, 2009 low.

Okay, the one-year anniversary for the market's four-minute mile is here. So is it now finally out of the sewer? No one knows the answer to that one, but I'm sure, without much thought, I could rattle off a dozen reasons as to why it is, or another dozen reasons, why is isn't, and I'm pretty certain any market player could do the same.

Let's say, for argument's sake, you think the worst of the bad news is behind us and the trend is still up. What do you buy? And importantly, too, what do you shun? For some thoughts, I rang up four pros, each of whom sees further market gains, but who also hoists cautionary flags.

One, San Francisco money manager Gary Wollin, who runs about $100 million of assets under the banner Gary Wollin & Co., contends if the economy continues its gradual improvement--which he expects--it will kick off the second round of the bull market which could boost the Dow (now at about 10,590) to 11,500 by year end. That second wave, as he sees it, will be spurred by the broad return of retail investors, who missed the recent rebound and will get fed up sitting with sizable cash in low- yielding CDs and money market funds. At some point, Wollin says, retail investors will realize they can't wait till every light is green.

Near term, though, say for the next month or so, he sees a relatively flat market, reflecting a tug of war.

On one side of the rope, he points out, are those aforementioned investors with lots of cash who are earning very little and a steady flow of favorable news about an improving economy. On the other side are the worriers who focus on the negatives, such as lofty unemployment, a second wave of foreclosures precipitating a further drop in the value of residential real estate and the major bleeding on the way in commercial real estate.

His investment enthusiasm centers on beneficiaries of infrastructure and capital spending and companies with pricing power. In this context, he favors U.S. Steel, Freeport McMoRan, Chevron, IBM. Intel and Cisco Systems.

On the negative side, Wollin says he would avoid companies with exposure to medical insurance because the government has put them in a vice. In particular, he points to Humana, Aetna, Cigna and UnitedHealth Group. He also gives mobile home maker Winnebago Industries a bad grade, with Wollin citing likely increases in raw material costs, higher gas prices, a trend likely to continue, and borrowing difficulty.

Charles Carlson, a market analyst at Dow Theory Forecasts, one of the country's leading investment newsletters that dates back to 1946, says he's not convinced first half profits--which Wall Street has raised quite a bit--will meet investor expectations. As such, he expects a rocky, sideways market in the first six months, as well as some near term trauma that could send the Dow skidding to 9,200, a one-third pullback from its recent January high of around 10,700.

After that, though, he looks for peppier second half growth fueled by an economic pickup and stronger revenue gains. Likewise, he thinks investors should stop worrying about the threat of higher interest rates because he feels the Fed is unlikely to tighten when unemployment is so high and inflation is so low. He also hastens to note there is a political risk, namely significantly higher taxes on investments, but he believes the resiliency of the market strongly suggests higher prices at year end, say an 11,000 Dow.

His favorite stocks--each of which he views as a potential 15% to 20% gainer over the next 12 months--are Aflac, Direct TV, General Mills, IBM and Ross Stores.

In contrast, the newsletter is advising subscribers to shun 10 stocks that it believes face industry or company-specific problems with no easy solutions. Likewise, they show up poorly in the letter's stock- rating system. They are Alcoa, Anadarko Petroleum, Applied Materials, Bank of America, Bank of New York Mellon, Citigroup, Devon Energy, Motorola, Nucor and Valero Energy.

Carter Braxton Worth, the chief market technician of Oppenheimer & Co., says a key question for investors is whether the 9.1% selloff between mid-January and Mid-February was a normal correction, plus a dose of profit-taking, in an ongoing healthy uptrend, or a decline that foreshadows longer term weakness for equities. His technical readings, he tells me, indicate the selloff was simply normal selling rather than a sign of something worse. Worth expects a speedy bounce-back to the levels prior to the selloff and a period of backing and filling over the next month or two. There is no evidence at this point, he says, to suggest another swoon.

He finds important consumer stocks, such as Nike, Dollar Tree, Carnival Corp. and Priceline, appear to be breaking out to 52-week highs. Other stocks looking strong to him include Celgene, Corning, Intel, Gymboree and Prudential Financial.

On the other side of the fence, Worth takes note of stocks that are throwing off negative readings, namely Motorola, Yahoo, CME Group, J.B. Hunt Transport Services and MasterCard (which has shown great strength in recent sessions).

David Rosen, the chief investment officer of the Graham & Dodd Fund PLC, views the market as undervalued, given an abundance of low price-earnings multiples, coupled with such corporate plusses as sizable debt reduction and lower operating costs. "We see 10%-15% upside this year," observes Rosen, who favors such stocks as Devon Energy, MetLife, Nucor, JPMorgan Chase and Coca-Cola. On the other hand, he says he would avoid companies with a lot of debt because those that need refinancing are going to have a tough time. Ditto the banking industry because of his concern about the viability of bank loan portfolios.

Short term, Rosen sees a lot to worry about. In particular, he singles out the level of government spending and its impact on the deficit, the performance of the Euro versus the dollar, and the fate of the health care bill. "There are a lot of question marks," he says.

Though favorably disposed to the market, he's obviously a nervous Nellie, noting "I'm a stock market bull with the heart of a chicken."

British-born economist JC Spender, economics professor at the Open University School of Business in Milton Keynes, U.K., concurs with the chicken strategy. Taking note of the rising market, he contends "we're seeing a new form of irrational exuberance. Wall Street is pushing stocks, and if you say buy enough times, people will believe it. But they should be selling, not buying," he says. "High unemployment, continuing housing problems, European debt woes and the inability of the government to goose the economy pretty much attest to that."

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