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Our Top IRA Picks

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. April 15 isn't just your tax return deadline; it's also the last day to contribute money to an IRA for the 2012 tax year.

Depending on your income, most folks can contribute $5,000 to an IRA. Folks over 50 can contribute even more to their IRAs. So if you have some money that you want to put to work, where should you put it?

Well, we have some ideas for you. We checked in with some of Morningstar's top strategists for both core and opportunistic picks for investors. We're going to start off with some great core ideas.

Russ Kinnel: My core pick for fund investors is Dodge & Cox Global. It's just a great low-cost fund that will get you very diversified, because it covers the whole globe, and you have very experienced value investors at Dodge & Cox--a very deep team as well. Lots of experienced analysts. There is very low turnover at the firm, so it's a sort of fund you can buy, put away, forget about for a long time.

The fund has less than five year's track record, so you may wonder why I'm recommending it. But if you look at the components, it's really Dodge & Cox Stock Fund, which has been around about 20 years, and Dodge & Cox International, which has a little over 10 years' track record. So they have glued those together, and you've got a very experienced team with a very good track record--not perfect, but over the long-haul it should do very well for investors.

Heather Brilliant: Our top core pick is NOV, National Oilwell Varco, and NOV is the largest provider of rig equipments in the world with about a 60% market share according to our estimates. We think it looks really interestingly because it is trading at about a 30% discount to what we think it's worth. Our fair value estimate is $98 per share. Essentially, we think the market is pretty concerned about Cameron, one of its competitors, coming in and taking some business recently.

But at the end of the day, we think with a wide-moat positive trend, National Oilwell Varco is extremely well-positioned to benefit from a low-cost position relative to its competitors and also a history of reliability with its customers that we think will keep them coming back to NOV over the long term.

Sam Lee: My core pick is PIMCO Total Return ETF [ticker] BOND. I think it is a very, very good all-around fixed-income fund. This is arguably the only fixed-income fund that you need.

I think many investors make the mistake today of trying to pick their own fixed-income exposure, so a little bit of municipal bonds here, long-duration bonds here, a little bit of international bonds there. And that is probably not going to work out for most investors, because number one you are probably pay more to do that. Number two, most investors do not have the expertise to actually set these allocations themselves. So my best idea is actually just hire Bill Gross to do it for you instead of trying to do it yourself.

Josh Peters: My core pick among higher-yielding stocks right now is Kraft Foods Group, ticker symbol KRFT. It's certainly a name that's going to be familiar to lots and lots income investors, but a lot has changed in this business having been spun off from the former Kraft Foods, which is now company called Mondelez International.

This is the classic Kraft brands, the cheese, the Oscar Mayer bacon, Lunchables, Miracle Whip--these things that may not get you real excited, but the story I love here is that you don't have just a big dividend right off the bat here, about 4.3%, but you've also got a management team that's now dedicated to revitalizing these brands after previous management had really just milked them for cash for years. So I think it's a very solid base to provide that dividend as well as a good growth story going forward with not a whole lot of risks attached.

Stipp: For investors who are looking to put some money in more opportunistic picks or maybe take on a little bit more risk, we also got a set of non-core or specialty players from these strategists.

Kinnel: One of my favorite aggressive plays for an IRA is PRIMECAP Odyssey Aggressive Growth. It's a really well run growth fund, but it's pretty aggressive. So you really need a long time horizon to own it--10 or 20 or 30 years. They own small and mid-caps mostly. They look for kind of contrarian growth stocks, but they're very experienced managers and analysts, and they won our Manager of the Year [awarded in 2003 for management of Vanguard PRIMECAP] because they're really just among the best growth investors out there. So this is a fund you can buy, put it away, and forget about it.

Brilliant: For a supporting role we would highlight Baidu. Baidu is an ADR trading under [ticker] BIDU, and it is really the Google of China. So it's a large search provider, and the advantage that Baidu has really comes in its knowledge, its tremendously deep knowledge of the individual Internet user in China, and that population knowledge really gives it more information than any of its competitors and really help it dominate the marketplace.

Baidu right now is trading at about 35% discount to what we think it's worth. Our fair value estimate is $137 per ADR, and that's because the market was really spooked by the last quarter's increase in expenses. And we do, of course, keep a very close eye on increasing expenses, especially at a firm like Baidu, but at the end of the day, we believe that Baidu is very carefully investing in its future growth. We're expecting more than 30% annualized growth over the next five years for this name, and we think it's trading at a tremendous discount right now.

Lee: So my supporting player ETF is Wisdom Tree Japan Equity Hedged, ticker DXJ, and this is more of a speculative bet rather than a long-term holding. Right now, the Japanese yen is currently devaluing, and momentum tends to be one of the most powerful forces in the market, and Japanese shares are fairly cheap versus history. So you combine momentum plus value and you get a really great combination that should work out over the next 12 months.

Peters: Well, my definition of opportunistic is a little bit more conservative than most, but within that high-yield universe, I actually look at Intel as being kind of opportunistic right now. The stock yields about 4.5%; the reason the yield is high is twofold. One is, the company does pay a fairly generous dividend out of its abundant cash flows, but the stock has also been beaten up. People are worried about the PC cycle, people are worried about the fact that Intel hasn't gotten lot of traction in mobile devices, and even in a weak environment here, the company is actually increasing its capital spending. But I actually like that story. Part of my thesis on Intel is you want the real strong competitor that has the financial resources and the technological know-how to be investing and growing into business, even as its competitors are in retrenchment mode.

So with that dividend, I think, helping limit your downside, but certainly forming the case for the stock being quite inexpensive at this point, it's a name I like quite a bit. A little bit riskier than, say, a Kraft Foods Group, but one that I think is certainly meriting investors' attention right now.

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