April/May 2010 Picks

Exchange-Traded Fund: iShares S&P Global Telecom IXP
We think iShares S&P Global Telecommunications could represent an interesting opportunity for yield-seeking investors. Although it courts a portfolio of about 45 stocks, iShares S&P Global Telecommunications is very top-heavy thanks to its market-cap- weighted structure. In fact, the fund's top 10 holdings soak up approximately 70% of total assets. The fund's heavy concentration, however, shouldn't--by itself--deter investors, as its top holdings represent some of the industry's top-tier franchises that boast diverse product portfolios and geographic exposure.

This fund's valuation metrics compare favorably against broader market indexes, and it currently trades at a substantial discount to our equity analysts' aggregated fair value estimates. Moreover, we think strong fundamentals for the telecom industry will bolster future earning potential. The global exposure afforded by the fund is another big positive: Investors can partake in emerging markets' rapid adoption of telecom services without assuming single-stock or single-country risk. (John Gabriel)

Stock: Thermo Fisher Scientific TMO
Thermo Fisher Scientific is a laboratory supply giant with an unmatched breadth of product offerings and the largest salesforce in the industry. The company's efforts to brand itself as a one-stop shop for its research customers as well as lessen its exposure to capital cycles--key reasons behind its 2006 merger--are proving to be visionary in this tough economic environment, as Thermo Fisher is gaining market share despite devastating macro conditions. Our confidence in the firm's ability to emerge from the economic downturn a stronger company, with wise deployment of its robust cash flow, stems in part from our belief in its management. While the firm's long-term CEO Marijn Dekkers left to take over as CEO of Bayer, we're confident his replacement Marc Casper will fill in adequately. (Haywood Kelly)PAGEBREAK

Mutual Fund: Third Avenue Focused Credit TFCIX
This fund is built for the times. Despite a surging equity market in 2009 the economy remains on shaky ground, and there's loads of uncertainty about many firms' capital positions. In comes Third Avenue with this fund. The firm has a long and strong credit heritage, specializing in distressed securities and special situations. Manager Jeff Gary and his team hold a core portfolio of performing bonds and loans, stressed credits where they see a low likelihood of default, and specific capital infusions among firms most often emerging from bankruptcy. Gary will make small, tactical bets among riskier fare, such as restructurings and highly distressed but performing credits. A recent purchase of a debtor-in-possession loan in Lyondell Chemical is a case in point. After scouring the capital structure, Gary bought into a second-priority DIP loan that will receive a new secured loan as the firm emerges from bankruptcy. The loan is much safer than its junior counterparts yet has strong upside potential. In other hands this strategy would have us worried. But Third Avenue's track record inspires confidence. (Michael Breen)

Separate Account: Jensen Large Cap Quality Growth
Quality never goes out of style, and this separate account is superior. Its managers' mantra is "enduring wealth comes from owning great companies for a long time," and one look at this portfolio confirms that stance. It's long been full of dominant franchises with clean finances and strong returns on capital, such as top holding Microsoft MSFT. The software maker isn't the rapid grower it once was, but it has virtually no debt, and its net margin and ROE are more than three times higher than the S&P 500's. Yet, it trades at a discount to the overall market. The rest of the portfolio follows suit. Nearly every holding has much lower debt than the S&P 500 yet delivers considerably higher profitability. The separate account's P/E ratio is just a hair higher than the market's--a reasonable premium considering its much higher quality. Its main risk is one that most investors can happily live with: Its high-quality names crank out solid absolute gains but lag racier peers in markets where speculative fare does best, such as 2009. But they lose considerable less in downdrafts. That's a recipe for long-term success. (Michael Breen)

Hindsight: Spring 2009 à la Carte
We're three-for-four with our picks from early 2009. The big laggard has been Elements S&P CTI ETN, an exchange-traded note that takes long and short positions in six commodity sectors. It's built as a diversifier that can deliver positive returns in a wide range of market types. But a raging bull market for stocks apparently isn't one of them. This ETN has lost 20% since we recommended it, while the S&P 500 Index has gained 34%. Despite the near-term setback, Morningstar's ETF analysts think this ETN has long-term advantages that will enable it to deliver solid returns with little or no correlation with major equity indexes. Our winners list is headed by stock pick Compass Minerals CMP. It has gained a bit more than the overall market, benefiting from solid demand and expanding margins on its road de-icing salt. Its fertilizer business also looks well positioned to benefit from rising global demand. Separate account UMB Asset Management International Equity has continued to hit the mark with its emphasis on stable growers with strong balance sheets. And our mutual fund pick, PIMCO All Asset PASDX, has gained an equitylike 28% since we recommended it, despite being a moderate-allocation fund that never puts more than half its assets in stocks. (Michael Breen)