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Stock Outlook: Where to Find Value In an Uncertain Market

Despite a volatile first quarter, stocks aren't much above where they were at the beginning of the year.

As of Thursday's close, the Dow Jones Industrial Average was up only 0.8%, while the Nasdaq was ahead 2.3% and the S&P 500 up 1.8%

But even if the major averages aren't showing big gains, smart investors know where to look for growth opportuntities.

"We are kind of adrift right now and people are a little confused in regard to the direction of the market," Barry James, portfolio manager for James Advantage Funds, told CNBC.com. "But there are always pockets of relative value."

James, for one, sees value in the drug sector. "We like some of the pharmaceuticals like Merck or Pfizer , which have been beaten up for so long, they probably have some upside," he said.

James also recommends EZCORP , a lending company that owns pawn shops and provides payday lending services. "It doesn't matter what the economy is doing, they have learned how to make money," said James.

James Advantage Funds owns all of his recommended stocks in their portfolio.

Looking at Blue Chips

"I think there is tremendous value to be found in a General Electric , Citigroup , Johnson & Johnson or Amgen ," said Gregory Church, chief investment officer with Church Capital Management.  "We've seen the P/Es of these companies get so compressed based on historical standards.

Church also recommends buying oil drillers on dips in crude oil prices.  "The macro trend is up," he said.  "You want to own drillers like Nabors , Baker Hughes  and Royal Dutch   for the long pull."

Church personally owns all of his recommendations. General Electric is the parent company of CNBC.

Others see opportunity in beaten-down financial stocks.

"We like the financial services sector that has been the bogey man recently with concern over the subprime market," said David Dietze, chief investment strategist at Point View Financial Services.  "The good news is that this sector has really been sold off.  We're advocating doing a little homework and looking for those responsible lenders."

Dietze said his number one pick is Countrywide Financial .  "They are very well diversified and only a small portion of their business involves subprime," he said.

Dietze owns Countrywide personally and in Point View's portfolio.

Alec Young, equity market strategist for Standard and Poors, recommends investors place 10% to 20% of their portfolio in midcap stocks. 

"We think it's an overlooked part of the market, maybe a sweet spot," said Young.  "The valuations are a little higher, but we're looking for 14% earnings growth in this area this year versus only 7% for the S&P 500."

Young said the easiest way to get midcap exposure is to buy MDY , the exchange traded fund for the S&P Midcap 400.  From there, he said investors could augment their midcap holdings with individual stocks such as Covance, a drug development services company, and Trinity Industries , a company that manufactures transportation and highway products such as guardrails, tankers and railroad cars.

Young does not own any of his recommended stocks.

Buy, but Diversify

Even though they expect a slowdown in earnings growth, many analysts say stocks are still a good bet for long-term investors who maintain a defensive strategy.

"I would advocate diversification right now because the markets are pretty volatile ahead of first-quarter earnings," said Michael Cuggino, portfolio manager for Permanent Portfolio Funds. "I suggest a strategy that not only incorporates growth stocks, but also gold and silver to potentially guard against inflation risk or a continued decline in the dollar."

"We like utilities, energy and non-cyclicals as the bit more defensive plays," said James. "They're not particularly exciting but they are steady in terms of their earnings and that will attract folks."

"The past decade in the market has been very disorienting, so being scared to be in stocks will be a common, but big mistake for new investors," said Stephen Wood, portfolio strategist at Russell Investment Group.  "If you have a 15-year horizon, don't let recent volatility scare you away."

Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at phyllis.goffney@nbcuni.com.