15 Stock Picks from Top Mutual-Fund Managers

As any good contrarian investor knows, the time to buy is when there’s blood on the streets. The roads of America may not yet be sanguinary, but virtually every stock on the list below has been bleeding for the past two or so months. That means they’re a lot cheaper than they once were, and in many instances undeservedly so.

We took advantage of the recent Morningstar Investment Conference in Chicago to buttonhole a baker’s dozen of managers and ask them to name the single stock that investors had to own. Their answers are below. Share prices and related data are as of the July 6 close.

International Business Machines (IBM)

We’ll start with Bill Miller, the well-known manager of Legg Mason Value Trust (symbol LGVAX) and Legg Mason Opportunity Trust (LMOPX). We didn’t so much buttonhole Miller as listen to what he had to say at a panel discussion. When asked what stock he would own for the next five years, his response was IBM. The computer hardware and services giant is “representative of the value found in U.S. mega caps,” he said. The stock, at $123.46, trades for 11 times analysts’ estimated earnings for 2010. At that price, Miller sees at least 30% upside over the next five years.

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Davide Campari-Milano (DVDCY.PK)

Veteran foreign-stock picker Mark Yockey names Davide Campari-Milano as his top selection (the company is listed on the Italian stock exchange, but its American depositary receipts trade on the pink sheets in the U.S.). In addition to selling its eponymous Campari bitters, the company produces a top Ouzo brand and recently purchased bourbon label Wild Turkey. But Yockey, who manages several Artisan funds -- including Artisan International Small Cap (ARTJX), which is closed to new investors -- favors Davide for its SKYY Vodka brand, which is a premium label but is cheaper than the priciest brands. “The company generates a lot of free cash flow,” and Davide’s ADRs, at $2.61, trade at a reasonable 12 times earnings, says Yockey.

American Express (AXP)

Dan O’Keefe, another Artisan manager, says he is finding the best opportunities today among quality businesses with good long-term growth prospects. In normal times, says O’Keefe, who runs Artisan Global Value (ARTGX), such companies command a premium price, but “that premium is very modest today.” For example, his top pick, American Express, will continue to benefit as the world shifts from using currency to paying for things electronically. At $39.21, the stock trades at 13 times estimated 2010 earnings. “Management is great, the company has a strong balance sheet and it managed to maintain profitability throughout the financial crisis,” he says. “American Express can grow even if the economy doesn’t.”

Tempur-Pedic International (TPX)

Derek Smashey, co-manager of Scout Mid Cap Fund (UMBMX), is bedding down with Tempur-Pedic International, the Lexington, Ky., mattress maker. Known for its pricey but popular memory-foam mattresses, the company is introducing its new Tempur-Cloud collection, a line of soft mattresses to appeal to the part of the population that prefers fluffier accommodations. At $28.41, the stock sells for 15 times estimated 2010 profits.

Tidewater (TDW)

Mark Travis, manager of Intrepid Capital (ICMBX), favors Tidewater, which provides supply boats and other marine services to offshore-drilling platforms. Although the company is based in New Orleans, only 7% of its revenue is generated from business in the Gulf of Mexico. Travis thinks the stock, which has plunged 23% since the BP Deepwater Horizon oil spill began, is a bargain. At $38.56, the shares trade for ten times expected profits for the fiscal year that ends next March 31. “Tidewater has more cash on hand than its peers, so it can weather bad times in the industry better,” Travis says.

Petrobank Energy (PBEGF.PK)

Sticking with the energy theme, Kent Croft, co-manager of Croft Value (CLVFX), is banking on Petrobank Energy, a Canadian oil company. He says that Petrobank has a proprietary method for extracting petroleum from Canadian oil sands that uses less water than its rivals use. The Calgary company also holds an 80% stake in a Columbian oil firm. “It’s my favorite company in the portfolio,” says Croft. “We owned it for five years, it has increased tenfold and we still like it.” At $35.55, the stock is down 32% since the BP oil spill.

Noble (NE)

Barry James, manager of James Market Neutral (JAMNX), sees value throughout the energy sector. His pick is offshore driller Noble, which, at $31.89, is down 24% since the BP disaster. Eight of Noble’s 62 offshore rigs are located in the Gulf of Mexico, accounting for about 22% of last year’s revenue. “Even with the offshore moratorium in the Gulf, Noble is still going to be drilling,” James says. The stock trades at a mere seven times 2010 earnings estimates.

Aon Corp. (AON)

Steve Romick, manager of FPA Crescent (FPACX), is looking for stocks with both the strength to survive potentially deflationary times and the ability to shine in an environment of rising prices, which he figures will arrive within a few years. One of his favorites is Aon Corp., the big insurance broker. Aon, which generates the bulk of its revenues abroad, has negligible capital-investment requirements and sits atop a pile of cash from insurance premiums. That money will become more valuable when interest rates finally start to rise. And when inflation arrives, Romick figures, Aon’s insurance rates will rise along with prices for things that need insurance, such as buildings. At $37.24, the stock sells for 11 times projected 2010 earnings.

Sodexo (SDXAY.PK)

Romick’s buddy Charles de Vaulx, co-manager of IVA Worldwide (IVWAX), is on a similar search for financially strong service businesses with modest investment needs and the ability to jack up prices once inflation rears its head. His pick is Sodexo, a French food-catering company that operates globally and books 40% of its sales in North America. Sodexo, which generates annual sales of $18 billion, serves customers such as corporations, hospitals, universities and senior homes. Its ADRs, at $59.85, trade at 18 times this year’s estimated earnings and yield 2.9%.

Nidec (NJ)

Jim Moffett, manager of Scout International (UMBWX), seeks well-managed, financially strong companies that are leaders in their industries. His top pick is Nidec, a Japanese maker of small motors used in household appliances, industrial equipment, computers and cars -- think power windows, door locks and steering. Moffett says the computer segment controls 70% of that market and continues to grow. At $21.64, the stock, which trades as ADRs, goes for 17 times forecasted profits for the year that ends next March.

Holcim Ltd. (HCMLY.PK)

Another relatively unfamiliar company, Holcim Ltd., gets the nod from Laura Geritz, co-manager of the Wasatch Emerging Markets Small Cap Fund (WAEMX). Holcim, Wasatch’s largest holding at last report, is one of three Indonesian cement companies. “Cement in the emerging world is not anything like it is in the developed world,” says Geritz. “In these countries, it’s a consumer good, so it’s like owning a retail stock.” With little competition and increasing demand, Geritz expects Holcim to deliver big jumps in sales and profits. Its ADRs trade at $13.25.

JP Morgan (JPM)

A couple of managers wouldn’t let us pin them down on one name. One of them, Rob Gensler, manager of T. Rowe Price Global Stock (PRGSX), says he’s finding some value in the financial sector, which has been beaten down because of uncertainty surrounding new financial-reform legislation. But JP Morgan, he says, should retain its market-leading position. “It absolutely won versus its competition as a result of the financial crisis.” At $36.33, the stock trades for 12 times estimated 2010 profits.

Rolls Royce Group (RYCEY.PK)

Gensler also likes companies poised to benefit from growing demand in emerging nations, where he thinks gross domestic product will grow at annual pace of 5% to 7.5% in coming years. Rolls Royce Group “will benefit from the emerging world but doesn’t face any competition from emerging markets,” he says. Rolls Royce is involved in the aerospace, marine and energy businesses but does not make the famous luxury car of the same name; the company is based in London, and its ADRs trade at $41.83 on the pink sheets in the U.S.

Baxter International (BAX)

Similarly, Michael Keller, co-manager of BBH Core Select (BBTEX), insisted that he couldn’t pick one child he loves the most. But, he says, he was thrilled when he was recently able to pick up Baxter International at what he thought was a bargain price after the company’s management lowered its profit forecast for 2010. Baxter is a leader in kidney treatments and, says Keller, “70% of its lines of business hold a number one or number two market-share position.” At $41.79, the stock trades for 11 times estimated 2010 earnings.

Waste Management Inc. (WM)

Keller also likes garbage collector Waste Management Inc. for the deftness with which its leaders handled the recession. Says he: “The company’s free cash flow has been remarkably consistent, and although the business has been pressured by the economy, management has still found ways to grow.” At $31.73, Waste stock trades for 15 times estimated 2010 earnings.

This article was written by Thomas M. Anderson, Elizabeth Ody, Stacy Rapacon, and Andrew Tanzer.