Retail investors looking to jump back into the stock market may find it difficult to find out where to even begin given the wealth of mutual funds and ETFs out there. And even those comfortable with their fund-based portfolios may want to explore the field of individual stocks, which are riskier than funds but potentially more rewarding.
To help out the more active small investor, we conducted an informal survey of money managers and market strategists to find out how they pick stocks and which ones they like. Here are the results:
Good Fundamentals, Bearish Analysts
Todd Salamone, senior vice president at Schaeffer's Investment Research, said he looks for stocks with negative sentiment despite strong earnings and upward momentum in share price.
Some of the names that fit this bill are Buffalo Wild Wings and Chipotle Mexican Grill in the casual dining group as well as leisurewear retailer Crocs.
"We're taking a contrarian approach but we're not contrarian in a sense that if analysts don’t like it we automatically like it but we want to see more evidence they could be on the wrong side of the trade," he said. "We incorporate sentiment but combine it with price action and fundamentals."
Salmone said he also looks for companies with a high level of short interest, which raises the possibility of a short squeeze.
Credit card giant Mastercard and Amazon.com are two well-known names that have seen a bevy of short sellers place bets against them in recent months.
Despite concerns regarding U.S. consumer spending, Mastercard managed to blow away analysts' quarterly earnings estimates in May, he says.
"That is a stock that even leading up to earnings was trading at all-time highs," he said. "There is still a lot of skepticism for Mastercard and even though it had strong earnings, short interest actually increased in May by 20%."
Value And Large-Cap Stocks
Buy Value, Hold Value
Wendell Perkins, chief investment officer and fund manager at Johnson Asset Management describes himself as a value-oriented investor and one stock he says that is undervalued and underappreciated is Quest Diagnostics, the country's largest medical test services provider.
"It has fallen out of favor but there is nothing fundamentally wrong with the business," he contends. "The shares are pretty cheap with good long-term growth, a great balance sheet and trades at a 52-week low which is rare in this market."
Quest and Laboratory Corp. of America, the other major player in the diagnostics test industry, have both come under pressure as the two battle it out for testing contracts with big HMOs such as UnitedHealthCare, he says.
Perkins said he wouldn't be surprised to see the company acquired by a private equity firm.
"It does lend itself to the M&A marketplace," he said. "That's not why we own it but that is definitely a possibility. At some point, they will not be able to withstand the pressure to sell if they can't get it right -- they will either get it right or be acquired."
Foot-Shooting and Toe-Stubbing Stocks
Perkins said one stock that is very cheap but continues to frustrate investors is IT services firm Computer Sciences.
"We're a value buyer so we like companies that are cheap and Computer Sciences fits that mold," he said. "It's a great company but they always seem to do something and shoot themselves in the foot."
Avid Technology is one stock Jack McPherson, a portfolio manager at Awad Asset Management, likes for the long haul. Avid makes digital video editing software in addition to other products including iNews, a newsroom software tool used by news organizations including CNBC.
"Our style is to buy and hold, we're not traders," says McPherson. "We look at stuff that we want to hold for a couple of years. The digital wave is not going away and these guys have the best products in the industry."
"It's somewhat contrarian at this point because the digital story has been out there for awhile but these guys have keep stubbing their toes," he said. "Avid made an acquisition of a digital software company that Wall Street is not in love with at this point."
Merit Medical Systems, which makes disposable medical products used in a variety of surgical procedures, is one stock that the small cap fund manager says is "underfollowed and overlooked."
Merit is in what McPherson refers to as the early stages of "harvest mode" as sales of new products begin to roll in.
"This is a multi-year opportunity," McPherson says. "It's definitely not a flip."
Large-Cap Stocks, Big Gains
Hewlett-Packard and The Walt Disney Co. are two household names favored by Michael Cuggino, president of San Francisco-based Permanent Portfolio Funds, which takes a long-term approach to investing.
Although HP shares have already come a long way, gaining more than 40% in the past 12 months, Cuggino thinks the stock has further upside potential as the tech hardware company continues to grow its many businesses and gain on competitors like Dell and IBM.
"The stock is not as cheap as it once was but the growth prospects are still there," Cuggino said. "The printing business is doing well, the PC business is taking share from Dell and there is a lot more room to grow in the consulting business. I also expect the Mercury Interactive software business to grow as well, all while reducing operating costs which is going to flow to stock outperformance."
Walt Disney is another stock which has rebounded in the last year.
"Any entertainment media company is only good as the content they are providing and one of the problems a few years ago was that they were producing content nobody wanted to see," he said.
That has now changed for Disney, Cuggino says, as the company is commanding high advertising premiums in its TV broadcasting divisions with number one programs in several categories.
Johnson Asset Management's Perkins said they started buying shares of Sprint Nextel nine months ago when it was "exceptionally cheap" at $16 but continue to accumulate shares despite a recent run in share price.
"We're still buying," Perkins says, "If they really get their act together meaningfully it's a stock that could double."
"The story is still very much in place," Perkins added. "It's a dominant wireless player in the U.S. market trading at a significant discount not just to wireless but to wireline as well. It's significantly cheaper than Verizon, AT&T and the wireless pure plays."