April/May 2009 Picks

Mutual Fund: Longleaf Partners LLPFX
This fund got hammered in 2008. It lost 50.6% as big positions in several stocks--including Dell DELL, Liberty Interactive LINTA, and Cemex CEMEX--cratered. Even so, the fund's long-term record is impeccable. It has returned an average of 9.3% annually since its 1987 inception, and we think that is a truer indication of management's ability than last year's debacle.

The fund has always taken big stakes in firms facing plenty of issues, but it has been right much more often than not over time. We recall the late 1990s when the fund started building what became a 16% stake in struggling Waste Management WMI. The stock languished for years, raising concerns about the judgment of comanagers Mason Hawkins and Staley Cates. But Waste Management eventually more than doubled, and the fund cleaned up. We don't think Hawkins and Cates, who were Morningstar's 2006 Domestic-Stock Managers of the Year, have lost their touch. They say that the portfolio is trading at less than half their estimate of fair value--its lowest level ever.

This bold fund will make mistakes. But we think every miss, such as General Motors GM, will be more than offset by several winners. The fund also carries a big, negative potential capital gains exposure, which should give it flexibility in dodging the taxman when it does rebound. (By Michael Breen) 

Exchange-Traded Fund: BLDRS Developed Markets 100 ADR Index ADRD
Low cost, big dividend yields, and high-quality holdings make this ETF a promising way to invest in the safest international equities.

This ETF tracks the Bank of New York Mellon Developed Markets 100 ADR Index, a market-cap-weighted index tracking 100 of the largest international companies that have shares listed on U.S. exchanges. This keeps the quality of the index holdings high, while keeping the benefits of diversification across both companies and sectors. We like the low expense ratio of 0.30% and the relatively high dividend yield on this ETF's underlying securities. We also slightly prefer the sector allocation of this ETF to rivals based upon the MSCI EAFE index because the fund holds smaller stakes in the vulnerable financials and industrials sectors while boasting larger investments in health care and the beaten-down energy sector. The fund's 20% stake in financials may still seem hefty, but by this point, it has very little exposure to the vulnerable British or Irish banks whose troubles made headlines in January.

As for the rest of the international markets, every stock suffered in the sell-off of 2008, the frogs and princes alike. This has generated some major bargains among the blue-chip companies held by the fund. Between the high quality of its constituent companies and desirable sector allocation, the ETF trades at an attractive discount to our estimated fair value of the underlying holdings. Equity investors who want to get paid while they wait for price appreciation should give this ETF a long look. (By Bradley Kay)PAGEBREAK

Stock: 3M MMM
The bear market has left many great companies trading at multiyear lows, and this wide-moat firm is one of them. We expect near-term head winds to continue, with further drops in revenue and earnings through 2009, but we believe our long-term assumptions continue to hold. The shares appear dirt cheap to us.

Management's expectation that 2009 earnings per share will fall 10% to 15% is in line with our projections. In addition, we think the firm's strategic decisions will benefit the firm over the long run. 3M plans to cut capital expenditures by 30% next year and save $200 million through bonus and vacation adjustments. Furthermore, the firm's health-care segment will likely remain resilient through trying times, offsetting continued weakness in electronics and other consumer-driven businesses.