Four Picks for the Present

This article first appeared in the February/March 2011 issue of Morningstar Advisor magazine. Get your free subscription today! 

Mutual Fund: Meridian Value MVALX
"Prudent" best describes this fund. Rick Aster and his team buy firms that have had a few bad quarters but where they see a catalyst for improvement. The managers avoid distressed firms in favor of fundamentally sound operations with near-term issues. The fund's stake in paint supplier Sherwin Williams SHW is typical. The managers bought it in early 2009 after its shares plummeted. But they correctly deduced that it would benefit from a rise in remodeling. This fund nearly keeps pace with racier rivals in up markets but loses much less in downdrafts. Net result: a strong long-term risk/reward profile. (Michael Breen)

Exchange-Traded Fund: SPDR KBW Bank KBE
The financials sector is attractive on a price/ fair-value basis, and we think the strong economic news of late bodes well for banks in particular. Unemployment claims are at their lowest level since before the Lehman collapse, retail sales and durable goods orders have exceeded expectations, and commercial and industrial loans outstanding at banks have stopped declining. This fund offers pure exposure to 24 large, money-center banks.

It uses a market-weighting approach, which results in large holdings of J.P. Morgan Chase JPM, Citigroup C, Bank of America BAC and Wells Fargo WFC, all of which have 4-star Morningstar Ratings. (Michael Rawson)

Separate Account: Diamond Hill Large Cap Equity
This separate account has an eye for quality. Manager Chuck Bath and his team focus on strong, established businesses with barriers to entry. They like a bargain but will pay up for proven businesses, so the portfolio's value measures, such as its price/earnings ratio, are a bit above the large-value category average. But, so are all of its profitability metrics, reflecting the separate account's quality bias. The managers don't shy away from stocks with near-term issues as long as their long-term prospects remain solid. Four of the portfolio's top five holdings are from the energy sector, including Anadarko Petroleum APC and Apache APA. The team added steadily to both throughout 2010 as their shares tumbled in the aftermath of the gulf oil spill. Both names have rebounded sharply. (Michael Breen)

Stock: Pfizer PFE
Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company's large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent- protected drugs, has helped Pfizer build a wide economic moat around its business. Pfizer has the financial resources and the established research power to support the development of more new drugs. Its strength is evidenced by the 100-plus drugs in its pipeline and more than 300 discovery projects. Although Pfizer's current pipeline is weighted more toward early-phase drugs, we expect the company to increase its number of Phase III drugs to almost 30 by late 2010.

Pfizer's vast financial resources support a leading salesforce. Pfizer's commitment to postapproval studies provides its salespeople with plenty of data to use as ammunition. While entrenched as an industry leader, Pfizer faces challenges in the near term. However, we believe that Pfizer's operations can withstand new generic competition, and the acquisition of Wyeth should help insulate Pfizer from any one particular patent loss. (David Krempa)

Hindsight: December/January 2010
Our picks from the December/January 2010 issue have been solid, not spectacular, but we remain confident in all of them. The best absolute performer has been mutual fund Matrix Advisors Value. It's gained 14% over the past year, a bit less than the S&P 500 Index's 16% run. The story is the same for the next-best performer, separate account Chase Investment Counsel Tax-Exempt Large Cap Growth. It's also up about 14% and just trails the benchmark. ETF pick SPDR DB Inflation- Protected Bond is in line with the BarCap US Aggregate Bond Index's 6.4% gain over the past year. The one laggard has been our stock pick, Covidien. Its price is unchanged since we recommended it, but Morningstar's equity analysts are even more optimistic now about its prospects, citing its dominant position in several markets, robust product pipeline, and strong management team. (Michael Breen)