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February/March 2012 Picks

Four offerings deemed to be right for right now.

Morningstar Analysts, 02/01/2012

Stock: Ford F
Fair Value Estimate: $23
Morningstar Rating: 5 Stars
Uncertainty: High
Economic Moat: None
Credit Rating: BBB-
Market Cap: $39.9 billion

Ford Motor Co.’s products, marketing, and union contract should position the automaker to compete better than in the past. Still, it will take time for the company to regain market share in the United States. Ford continues to increase its consideration in the United States, mostly because it did not take government loans and is making better cars. In 2010, Ford picked up nearly 0.9 percentage points of market share. Another key change is building more Ford models on common platforms, which will improve economies of scale. By middecade, Ford expects that 75% of its global production, or 6 million vehicles, will come from five vehicle architectures. This move will also allow Ford to switch production faster to meet changing demand while also cutting costs via better economies of scale.
Dave Whiston

Mutual Fund: Weitz Value WVALX
Category: Large Value
Investment Style: Large Blend
Morningstar Rating: 3 Stars
Total Assets: $946.3 million
Expenses: 1.21%
Turnover: 42.0%

Wally Weitz made a name for himself investing in cheap, distressed fare and later suffered for that strategy at times in the 2000s. He has lately toned things down, requiring a bigger margin of safety for troubled firms and scooping up more-established firms at sizable discounts to their prospects. Indeed, the fund recently owned just one major bank (Wells Fargo WFC) and has made a onceunimaginable foray into the technology sector. These moves have paid off nicely of late, and Weitz’s long-term record is still stellar. A greater reliance on sturdy fare and a longstanding double-digit cash position should serve investors well if markets remain rocky.
Greg Carlson

Separate Account: Jennison Large Cap Growth Equity
Category: Large Growth
Total Number of Holdings: 73
Morningstar Rating: 4 Stars
P/B Ratio: 4.46
Assets in Top 10 Holdings: 27.93%
Average Turnover Ratio: 65%

This is one of the most-dependable largegrowth strategies around. Sig Segalas, who’s managed this account for decades (he also has run Harbor Capital Appreciation HACAX since its 1990 inception), and his team seek out firms that are relatively stable and have strong earnings growth prospects, yet aren’t too pricey. It’s a balancing act, but they’ve pulled it off quite well on a consistent basis: They’ve outperformed most of its large-growth peers in most types of markets, and patches of weak returns have been short-lived. And the team’s recent heavy emphasis on quality businesses paid off in turbulent 2011.
Greg Carlson

Exchange-Traded Fund: PowerShares S&P 500 Low Volatility SPLV
Morningstar Category: Large Value
Expense Ratio: 0.25%
AUM: $985 million
SEC Yield: 3.1%
% Portfolio Wide Moat: 32%
% Portfolio Narrow Moat: 59%

One of the more popular trends in new ETFs has been low-volatility funds, and PowerShares S&P 500 Low Volatility SPLV is our pick among the crop. Low-volatility stocks, like value stocks and small-cap stocks, have historically provided higher risk-adjusted returns over a long time horizon. This “low volatility premium” runs counter to Modern Portfolio Theory and instead is attributed to a market environment in which investors tend to tilt toward higher-risk stocks with the expectation of higher returns. Ironically, their collective bet on high-beta stocks leads to low risk-adjusted returns. Lower-volatility portfolios also benefit more from the effects of compounding, relative to a market-cap-weighted portfolio. However, investors should be aware that low-volatility strategies tend to underperform during strong bull markets. This ETF holds the 100 stocks of the S&P 500 that have had the lowest volatility over the past year. Not surprisingly, it has a heavy exposure to consumer defensive and utility names.
Patricia Oey

Hindsight: December/January 2011

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