Schultz, manager of the MTB Mid-Cap Growth Fund , says investors are letting fear dictate their decisions. The perception is that some bonds are trading near record lows and some stocks have been overbought, though investors irrationally continue to buy large-company shares.
Schultz, however, says stocks are, on some indicators, at very attractive valuations.
"When investors become risk-averse, they want their cash here and now," Schultz says. "You get these flight-to-safety plays" in which utilities, telecom services and consumer staples outperform other sectors.
However, Schultz questions why investors are willing to pay so much for companies in those sectors when their growth profiles are getting worse.
"Utilities is forecast to have declining year-over-year earnings," Schultz says. "It's one of the few sectors that is trading near the peak of its historical multiple. I understand why some of this happens, but it is a real triumph of emotion over reason."
Schultz says mid-cap companies also are attractive because they have years of growth ahead of them, unlike some large-caps that start sinking under their own weight.
The mid-cap space includes a lot of companies with a long runway ahead of them with less risk than small-cap stocks, he says.
This year, mid-cap growth stocks have struggled compared to their larger-cap counterparts. The Russell 2000 Growth Index is down 3 percent in 2011. The Russell Mid-Cap Growth Index, meanwhile, is lower by 1.6 percent this year.
The Standard & Poor's 500, which includes the largest companies in the U.S. by market cap, is essentially flat.
Schultz's strategy has done well for fund investors. Over the past one, three and five years, the MTB Mid-Cap Growth Fund has annualized returns that outpace the benchmark Russell Mid-Cap Growth Index.
A $10,000 investment in the fund made 10 years ago would be worth $18,700 today, compared to $14,700 for the mid-cap growth category and $13,200 on the broader S&P 500 Index of the largest companies in the U.S. "Our strategy is very consistent and has been for years, through every market environment," Schultz says of his fund's success.
For investors looking to add a little more risk exposure to their portfolios for 2012, Schultz offers five stocks in his fund that he expects to outperform in 2012 and beyond.
Those picks are detailed below:
1. Lufkin Industries
Company Profile: Lufkin Industries makes pumping units used to lift oil from wells.
Market Cap: $2.1 billion
Share Price: $70.87 (Dec. 7)
Schultz's View: Schultz says that oil field services is a very good place for investors to be looking for mid-cap stocks of companies with lots of growth.
He says he has been hearing from companies that capital expenditure is looking very solid. That has led him to Lufkin, which he says still has a long runway for growth in the U.S. ahead of it.
"When oil and now gas wells are drilled, the initial production is brought to the surface by natural pressure," Schultz says. "When the natural pressure of the fields dissipates, the company will deploy artificial lifts to bring the resource to the surface. We expect that Lufkin will benefit as these wells mature and there is a need for the artificial lifts. There is a very strong secular trend because of the number of wells being drilled."
Schultz says that the company also sells its products internationally, even though the focus is on the U.S. He adds that the stock's valuation is very reasonable, even as the stock has climbed 13 percent this year.
"It was an undiscovered gem when we first bought it, but we continue to hold it," he says.
2. CBS Corp.
Company Profile: CBS is a media conglomerate with a focus on television broadcasting and film, publishing and Internet. CBS, Showtime Networks, CBS Studios, CNet, and CBS Radio are among the company's assets.
Market Cap: $16.9 billion
Share Price: $25.80 (Dec. 7)
Schultz's View: Like others, Schultz is a fan of CBS because of the success the company has had in monetizing its library of content.
Schultz says this stock, which is the top holding of the MTB Mid-Cap Growth Fund at a 2.5 percent weighting, benefits from more ad spending into 2012.
"Ad spending coming out of the recession has been a big help," Schultz says, pointing out that the stock is up 35 percent this year as most other stocks have struggled. "We still see strong trends there, especially heading into an election year."
Schultz says that investors may still not be convinced of CBS's potential because they look at earnings rather than cash flow.
"It's trading at a very reasonable multiple, especially relative to cash flow," he says. "Earnings are significantly lower than cash flow per share as a result of high depreciation and amortization expenses that should dissipate over the next couple of years. We should see earnings move upwards to the cash flow per share."
Company Profile: Autodesk is a maker of 3D design software.
Market Cap: $7.7 billion
Share Price: $33.97 (Dec. 7)
Schultz's View: Schultz argues that investors should be looking at technology in general, a sector that has mostly been ignored this year. He argues that the sector is trading at a very low valuation relative to cash flow.
Autodesk is one of his favorite picks in the tech sector because the stock has pulled back so much while the business hasn't deteriorated. Shares of Autodesk are down 11 percent this year, while the Technology SPDR ETF is up 2 percent in 2011.
Schultz expects that Autodesk should rebound nicely in 2012.
"It's a big exporter, so it tends to trade with a lot of sensitivity to the overall economy," Schultz says. "But you're not hearing from management that business is deteriorating to the extent that the stock has pulled back. It's very much a franchise player with cyclical drivers but some important secular drivers as we move to 3-D modeling. That's spurring increased revenue. We have expectations that it will rebound nicely from these levels."
Company Profile: Coach is a leading American designer and maker of luxury lifestyle handbags and accessories.
Market Cap: $18.3 billion
Share Price: $62.77 (Dec.7)
Schultz's View: Coach has been one of Schultz's largest holdings and he acknowledges its great success, up 13 percent this year and more than 350 percent since the March 2009 lows. In fact, the stock has done so well that Coach may not have many days left as a mid-cap.
Schultz says that his fund has focused on the bifurcation of retail success where high-end and low-end shops have fared best.
"The place that we didn't want to be caught in a slowing economy was the middle," he says. "We gravitated in our retail holdings to the upper end and the discounters. We married positions in stocks like Ross Stores with Coach and Tiffany. That strategic positioning was helpful."
Specific to Coach, Schultz sees a great brand and a company with a strong, growing international presence. "We were also encouraged by their responsiveness to the economic downturn in 2008," he says. "The upper end consumers continue to do very well."
Company Profile: Herbalife is a global nutrition company involved with the direct selling of weight-management products.
Market Cap: $6.4 billion
Share Price: $54.97 (Dec. 7)
Schultz's View: Schultz says he was caught off guard when Herbalife was pitched to him as an investment opportunity. The stock has been among the best performers this year, climbing more than 60 percent as the S&P 500 struggles to hold on to any gains.
"Herbalife is a different investment," Schultz says. "There is a lot of skepticism over the direct-sales model. I'll admit I was skeptical of the idea when it was presented to me by my team of analysts."
While he acknowledges that the company's model is a little opaque because of the multi-level marketing involved with direct selling, his investment in Herbalife is "still rooted in the idea that it has a very strong financial engine. There is very high cash flow generation," he says.
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