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October/November Picks

Four offerings deemed to be right for right now.

Morningstar Analysts, 10/12/2010

Mutual Fund: Templeton Global Total Return TGTRX
This world-bond fund only launched in late 2008, but it's a proven entity. Manager Michael Hasenstab has generated a great long- term record at Templeton Global Bond, where sovereign debt and currency plays are the meat and potatoes. Here, Hasentab can pull more levers. He's able to buy corporate bonds and can hold lower-quality debt. He did just that in late 2008 when the market downdraft sent corporates plunging. When the market bounced back a few months later and spreads narrowed, the fund cleaned up. Hasenstab's timing won't always be that perfect, but his track record indicated investors can expect him to hit the mark much more often than not. Michael Breen

Exchange-Traded Fund: Vanguard Information Technology ETF VGT
During the past five years, technology stocks typically traded at a 17.5 price/earnings multiple, compared with 15.3 for industrials. Currently, tech trades at about 14.4 times earnings, and industrials trade at 15.7 times. Morningstar analysts also think tech is undervalued, trading at a price/fair value of about 0.82.

Vanguard Information Technology ETF offers investors broad exposure to the technology sector, from high-quality large caps all the way down to small cap. By including small caps, it should minimize any potential loss from continued merger-and-acquisition activity. Michael Rawson

Separate Account: Westwood Management Balanced Portfolio
This separate account's quality bias has served it well over time. Susan Byrne and Mark Freeman keep the portfolio's bond sleeve anchored in high-quality debt and Treasuries. On the stock side, they make contrarian bets on firms with solid fundamentals. So, the portfolio's price measures and debt levels are well below the moderate-allocation norm, but its profitability measures, such as return on equity and net margin, are superior. Paying less for better companies is a recipe for success, and this separate account has delivered in spades over time. There's no reason to think it won't maintain its winning ways. Michael Breen

Stock: Home Depot HD
Home Depot, the world's largest home-improvement retailer, with more than $66 billion in revenue in 2009, spent the past three years battling economic headwinds and updating its distribution network. After a decade of aggressive expansion and store and concept growth, the company changed course; it sold its professional supply business in 2007 and closed its ancillary retail businesses in early 2009. Home Depot is now solely focused on its orange box stores and is engaged in a strategic overhaul of its supply chain. We believe the ongoing upgrades will strengthen the firm's competitive position, particularly as macro pressures abate in the coming years. The firm earns a wide economic moat rating because of its substantial economies of scale.

We have increased our fair value estimate to $42 per share from $40, following a solid 2009 performance, an improved 2010 outlook, and additional visibility and comfort in the company's supply-chain restructuring. Our fair value estimate implies forward price/ earnings of 23 times, an EV/EBITDA multiple of 11, and a free cash-flow yield of 5.4%. David Krempa

Hindsight August/September 2009
Our August/September 2009 picks have been propped up by the ETF selection. Wisdom Tree Emerging Markets Small Cap Dividend DGS focuses on small, local firms in emerging markets that trade cheap and pay big dividends. That's a nice combination, and it's been especially good the past year--the ETF has gained 24.2%, while the MSCI EAFE Index has been in the red. Separate account Luther King Capital Management Dedicated Target Equity has also delivered, gaining 6.65% since we recommended it. Stock pick KLA-Tencor KLAC, a specialty chipmaker, has bounced around but is on the upswing. Morningstar's analysts remain highly confident in it. The only clunker so far has been our mutual fund pick, Brandywine BRWIX. It's been slightly in the red during the past year. The firm made its name on the strength of its bottom-up analysis, specifically its "channel checks" that use human intelligence to monitor industry and company-specific trends. The fund has failed to execute in recent years and needs to start delivering soon to retain our recommendation. Michael Breen


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