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By Pat Dorsey, CFA | 12-07-2009 05:00 AM

Pat Dorsey's Picks: Education, Energy, and Financials

Despite the market run-up, Pat Dorsey still sees opportunity in for-profit education, pipelines, some financials.

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar. As part of Ideas Week here in December, as you're thinking about investments for 2010, where you should be putting new money in your portfolio, we thought we'd run through some of our favorite ideas in the equity universe.

Big picture, we're seeing a lot less opportunity than we were back in March. Back in March, easily a third to almost 40% of our equity universe was 5-star rated. Now that number is down quite a bit, to maybe 60 or 70 5-star stocks, as the market has run up rather quickly and, in many ways, has priced in the economic recovery that's going forward. That said, we do still think there are some opportunities, so let me just run through a number of them for you, kind of going sector by sector.

In the consumer area, not a lot of stuff that we're very excited about right now. Probably the one area we're focusing on the most are the for-profit education stocks, companies like Apollo and Strayer, which have been hit by some negative news recently. Apollo's had an informal SEC investigation. There are some possible regulatory changes on the horizon.

Net-net, we think that these companies are cheap, despite the bad news coming in, and that they've priced in a lot of this negative information. For-profit education tends to be a very profitable industry with very high returns on capital, very high levels of free cash flow.

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