Although defensive stocks have performed well this year, one fund manager said he is finding more attractive valuation in some slightly riskier mid-cap companies, including several regional banking stocks.
Jonathan Simon, the JPMorgan Mid-Cap Value Fund lead portfolio manager, told CNBC that his fund is adding cautiously to beta and risk as it enters 2012, and looks for the best opportunities on a daily basis.
"We’re finding more attractive situations in companies that have slightly greater sensitivity to the economic cycle," Simon said.
"They’re still very good companies with strong balance sheets, cash flow."
He defined mid-cap stocks as ones with a market cap in the range of $2 billion to around $15 to $20 billion.
"What’s important about that free cash flow is really how the management uses it, for us as shareholders, to increase the value of the company on a per-share basis for us over the long term," Simon said.
"So, they have to have a very disciplined approach to capital allocation — maybe making acquisitions, paying down debt, paying a dividend or a stock buyback. That’s the key.”
Among Simon’s picks are regional banks M&T Bank , Cullen/Frost Bankers and City National . These banks tend to focus on small-business loans rather than loans to commercial real-estate borrowers, he added.
“If just proves that there’s still a regional bank model that can make money and good returns, although it’s being a bit masked by the current environment,” he said.
He also recommended Sherwin-Williams , a company that caters to the independent paint contractor and one that he said “really embodies everything we look for in the quality of management and the quality of the franchise.”
Despite the housing downturn, the company, which trades at 15 times earnings, has managed to almost return its earnings per share to peak 2007 levels.
The JPMorgan Mid-Cap Value Fund holds positions in City National, Cullen/Frost Bankers, M&T Bank and Sherwin-Williams. Jonathan Simon invests in the fund.
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