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Lukewarm: The perfect stocks for this economy

United Technologies
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While it seems odd saying the economy is "midway" through its cycle when it's been five years since a recovery began, that's just the scenario investors are positioning for right now.

U.S. GDP growth first went positive post financial crisis five years ago, but since then growth has been spotty, actually dipping negative for a quarter in 2011 and last year too. The economy has basically bounced around 2 percent growth and economists expect that middling level to remain the norm for the foreseeable future.

The governments said Friday morning that growth in the fourth quarter was 2.2 percent, down from a 2.6 percent earlier reading.


So which stocks should outperform in this type of environment?

The money play:

Investors are attempting to have their cake and eat it too by purchasing shares of companies with both a high yield and a decent growth outlook.

They are looking for companies that are not overly defensive like consumer staples or utilities and ones that can put up strong EPS increases as the economy limps along.

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"I do like midcycle, but have to judge it in terms of where we are in the economy rather than how far the market has traveled," said Stephen Weiss of Short Hills Capital. "The recovery started out slow so the cycle is somewhat longer."

Weiss likes United Technologies, which sports a dividend yield of 2.1 percent. The aerospace conglomerate increased earnings per share by 10 percent last year and profit is expected to rise by another 3 percent this year, according to S&P Capital IQ.

Check out the growth/yield combo in Weiss' second pick, Quality Systems. The maker of health-care software pays a 4 percent dividend and is expected to increase revenue by 10 percent this year, according to analysts.

The interesting factor in all this analysis is the Federal Reserve. Typically, when the central bank starts to hike rates, one would want to buy momentum stocks benefiting from a strong economy. One would also want to sell high-yielding stocks as they would face growing competition from rising rates.

But this time is different, investors said.

The Fed, this time, is increasing its benchmark rate after it's been at zero for a very long period of time. And, while the market now expects a hike in June, there are many who believe that doesn't mean of string of increases will follow.

"A rotation to midcycle appears imminent, with the Fed slated to hike in 2015 and U.S. GDP growth picking up," said Savita Subramanian, in a note to clients this week. "Here, 'half growth, half yield' makes sense—some cyclicality plus growing income."

She likes software stocks as well as industrial conglomerates and semiconductor plays.

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There are some ETFs to beat this middling growth scenario as well.

"For growth, one area I'd look at is cybersecurity, as it offers some of the benefits of new tech and is an area where nearly every company will have to increase spending in the coming years," said Eric Mustin of WallachBeth Capital. " Further, it serves as something of a hedge against geopolitical stresses, since every time there is a cyberattack it creates headlines about the need for beefed up cybersecurity."

He suggest the PureFunds ISE CyberSecurity ETF (ticker 'HACK) as a way to bet on this trend, which should yield strong growth during any economic scenario.