It’s the downside of up markets. The longer and higher share prices advance, the harder it is to find good companies selling at attractive prices. So with Standard & Poor’s 500-stock index having more than tripled during a five-and-a-half-year bull run, we asked some of the best investors in the business for their best stock picks.
Our pros represent all manner of investing styles, including those who favor big companies and those who favor small fry, those who specialize in fast growers and those who seek bargains, and those who invest mainly in the U.S. and those who scour the globe for opportunities.
Here's a look at the best from the best.
Stock prices and other data as of Aug. 26. Earnings estimates provided by Thomson Reuters.
Comcast
- Recommended by: Mark Yockey52-week range: $41.06 - $56.49Estimated earnings growth (3-5 years): 17.0%Price-earnings ratio: 18
Mark Yockey manages several global stock portfolios at Artisan Partners, but he is probably best known as the lead manager of Artisan International (ARTIX). He thinks the global economic environment—low inflation, low interest rates and economic growth of 2% to 3% a year—is positive for stocks. Yockey looks for well-managed companies that dominate their market, with significant intellectual property and the ability to sell products and services for top dollar.
Yockey sees good value in the cable industry overall and in Comcast (CMCSA) in particular. Philadelphia-based Comcast also owns NBCUniversal, which provides media content to our numerous devices. The broadcaster’s earnings are growing at a double-digit percentage rate.
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Marsh & McLennan
- Recommended by: Mark Yockey52-week range: $40.94 - $53.55Estimated earnings growth (3-5 years): 12.4%Price-earnings ratio: 18
- Marsh & McLennan (MMC) is a New York City-based insurance broker that also does corporate consulting. It's among the "best in breed," in Yockey's opinion.
“These companies have become very efficient,” says Yockey, “and insurance premiums are among those things that never go down in price.” The result is a cash-generating business that enjoys consistent revenue growth.
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Baidu
- Recommended by: Mark Yockey52-week range: $132.31 - $229.60Estimated earnings growth (3-5 years): 36.4%Price-earnings ratio: 5
- Baidu (BIDU) is the Google of China, where the search-engine business is exploding and ad revenues along with it. Analysts expect Baidu’s revenues to surge 54% this year, with mobile search now accounting for 30% of sales. Baidu has already paid off for Yockey, but he’s in it for the long haul. “We could own this stock for the next 10 years,” he says.
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ASML Holding
- Recommended by: Mark Yockey52-week range: $79.66 - $101.85Estimated earnings growth (3-5 years): 33.0%Price-earnings ratio: 32
Yockey also likes the long-term prospects for Dutch company ASML Holding (ASML), which makes complex machines costing as much as $100 million that are used to manufacture semiconductors. Most of the world’s major chip makers are customers, Yockey says, and the biggest ones help finance ASML’s research and development. “They’re tied at the hip,” Yockey says. “Manufacturers need the latest equipment, and they want their biggest supplier to be successful.” The stock slumped recently on news of delayed orders but recovered after the company announced a breakthrough in its lithography technology.
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TJX Cos.
- Recommended by: Mark Yockey52-week range: $51.91 - $64.38Estimated earnings growth (3-5 years): 11.2%Price-earnings ratio: 18
Astute shoppers will recognize a bargain in the shares of the TJX Cos. (TJX), the operator of T.J. Maxx and Marshalls, which fell 16% in the first seven months of 2014. The problem is that the Massachusetts-based retailer doesn’t have much online clout, says Yockey. “But I think there’s always going to be a place for physical retailers selling high-quality brand names at attractive prices,” he adds.
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Credit Suisse
- Recommended by: Sarah Ketterer52-week range: $26.38 - $33.98Estimated earnings growth (3-5 years): 8.7%Price-earnings ratio: 11
- Credit Suisse (CS) fits the bill. Low interest rates won’t pressure profit margins forever. Meanwhile, the ongoing process of shedding poorly performing parts of its investment-banking and bond-trading businesses could free up some $6 billion in excess capital by 2016 that Ketterer thinks will be used to boost dividend payments.
Sarah Ketterer is cofounder and CEO of Causeway Capital Management, where she heads a team of 11 portfolio managers who scout out bargains in the U.S. and in foreign lands, both developed and emerging. “We’re positioned for a gradual shift to interest rates at more-normal levels,” says Ketterer. “We have a double-digit weight in banks, and we’ve bought into industries that are out of favor but have the potential to raise dividends.”
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USG Corp.
- Recommended by: Sarah Ketterer52-week range: $22.64 - $36.22Estimated earnings growth (3-5 years): 52.5%Price-earnings ratio: 16
As with banking, the real estate recovery has been painfully slow. USG Corp. (USG) makes wallboard and ceiling materials for residential and commercial projects, and distributes building supplies. The Chicago-based company beefed up its balance sheet and changed its pricing model, moving from project-based pricing to annual price hikes, which have stuck since 2012. Ketterer says the stock is so cheap, trading at 16 times estimated year-ahead earnings, that even if she’s wrong about an imminent turn in real estate, the risk in USG is minimal because shares already reflect investor pessimism.
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China Mobile
- Recommended by: Sarah Ketterer52-week range: $41.35 - $62.20Estimated earnings growth (3-5 years): 3.2%Price-earnings ratio: 15
Companies in transition are like catnip to Ketterer. Although China Mobile (CHL) already claims 62% of the wireless-phone market in China, its prospects have improved dramatically with upgraded technology that has allowed it to catch up with the coverage and data speed of its competitors. Ketterer sees a 10% annual growth rate in both subscribers and revenues over the next few years. The stock yields 3.5%, and a strong balance sheet bodes well for future payout hikes.
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International Consolidated Airlines Group
- Recommended by: Sarah Ketterer52-week range: $22.18 - $37.92Estimated earnings growth (3-5 years): 86.4%Price-earnings ratio: 9
- International Consolidated Airlines Group (ICAGY) was formed by the 2011 merger of British Airways and Spanish airline Iberia. The stock’s super-low price-earnings ratio—9, based on analysts’ estimated 2014 earnings—does not accurately reflect the value of those franchises, Ketterer says.
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Carnival Corp.
- Recommended by: Sarah Ketterer52-week range: $31.44 - $41.89Estimated earnings growth (3-5 years): 20.7%Price-earnings ratio: 19
A series of mishaps for cruise operator Carnival Corp. (CCL), ranging from tragic (the death of 32 passengers and crew members on the Costa Concordia off the coast of Italy) to gross (broken toilets on a ship in the Gulf of Mexico), led to a falloff in bookings and then to price cuts. But net revenues per berth are improving, fuel costs are declining, and Carnival is adding ships in fast-growing China. Ketterer thinks 2016 will be a banner year for profits, but investors aren’t convinced. Shares of Miami-based Carnival dropped 8.7% in the first seven months of 2014, while those of rival Royal Caribbean Cruises (RCL) rose 27.0%.
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Berry Plastics Group
- Recommended by: Cliff Greenberg52-week range: $18.09 - $26.50Estimated earnings growth (3-5 years): 15.3%Price-earnings ratio: 16
Cliff Greenberg, manager of Baron Small Cap (BSCFX) since the fund’s 1997 launch, loves to find stocks of fledgling companies and watch them take off. He looks for companies with long-term expansion opportunities and entrepreneurial managers. If the manager founded the business and has a large stake in it, so much the better. To find great companies at reasonable stock prices today, you have to go off the beaten track, says Greenberg.
The next time you get a drink at Subway, Starbucks or a similar venue, take note of the cup it’s in. Chances are it was made by Berry Plastics Group (BERY), which also makes many kinds of plastic packaging and containers, including prescription-drug vials and caps and the plastic food wrapping you see in grocery stores. The company is innovative (it has a replacement for environmentally unfriendly polystyrene foam) and adept at growing through acquisitions (it has made 38 in the past 25 years).
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Nord Anglia Education
- Recommended by: Cliff Greenberg52-week range: $16.39 - $22.44Estimated earnings growth (3-5 years): 43.1%Price-earnings ratio: 29
Greenberg gives private school operator Nord Anglia Education (NORD) high marks for its kindergarten-through-12th-grade academies in 13 countries. Most students are the kids of U.S. expats stationed abroad, with tuition often paid by corporations as part of a relocation deal. The schools are usually the best in the local market, so profit margins are high, as are student retention rates.
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On Assignment
- Recommended by: Cliff Greenberg52-week range: $26.23 - $39.86Estimated earnings growth (3-5 years): 14.8%Price-earnings ratio: 14
- On Assignment (ASGN) provides staffing for specialized jobs in the technology, health care and scientific fields. It benefits from a long-term shift toward using temp staffers rather than relying on permanent hires or outsourcing jobs to another concern. The stock’s P/E (14, based on estimated year-ahead earnings) is too low for a company that should generate annual earnings growth of close to 20% over the next few years, says Greenberg.
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The Container Store
- Recommended by: Cliff Greenberg52-week range: $20.32 – 47.07Estimated earnings growth (3-5 years): 31.6%Price-earnings ratio: 42
Patient investors can pick up bargains when good stocks stumble. After Kip Tindell, CEO of the Container Store (TCS), said in July that retailing was in a “funk,” the stock promptly went into one. The company reported disappointing earnings for the quarter that ended May 31. But Greenberg thinks the 36-year-old retailer, which invented the storage-and-organization niche, has staying power.
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Del Frisco’s Restaurant Group
- Recommended by: Cliff Greenberg52-week range: $17.53 - $29.61Estimated earnings growth (3-5 years): 20.0%Price-earnings ratio: 22
Is there a five-second rule for stocks? Shares in Del Frisco’s Restaurant Group (DFRG) hit the floor after the firm recently warned of delays in opening new restaurants. But investors who pick up the stock now could get a tasty treat. The company operates steak houses under the Double Eagle, Grille and Sullivan’s brands. Greenberg is confident that the delays are a temporary setback.
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Herbalife
- Recommended by: Sam Stewart52-week range: $48.26 - $83.51Estimated earnings growth (3-5 years): 14.3%Price-earnings ratio: 8
Sam Stewart founded Wasatch Advisors in 1975 and today is the lead manager of Wasatch World Innovators and Strategic Income funds. At this stage of the bull market, you won’t find great returns without taking on more risk, says Stewart. That’s why all of his picks are under a cloud of one sort or another. “The market is getting something wrong about these stocks,” he says. “If they pan out, you’ll do well.”
Hedge-fund manager William Ackman is the cause of the cloud hanging over Herbalife (HLF). Ackman, who has reportedly made a billion-dollar bet that the share price will fall, contends that the company’s multilevel marketing of weight-loss and nutritional products is a Ponzi scheme. Regulators have looked into Herbalife, but no formal accusations have been made. “Ackman is completely off-base,” says Stewart. Of more immediate concern: The stock sank 17% over two trading sessions in late July after Herbalife reported lower-than-expected earnings and trimmed its sales-growth outlook for 2014. But analysts still expect earnings to grow 17.1% this year and 14.3% in 2015.
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Ocwen Financial
- Recommended by: Sam Stewart52-week range: $24.87 - $60.18Estimated earnings growth (3-5 years): 40.0%Price-earnings ratio: 9
The lingering effects of a housing bust are a boon to Ocwen Financial (OCN), a mortgage servicer that specializes in subprime loans, collecting payments from high-risk borrowers and working with them to prevent foreclosures. Ocwen was set to acquire the servicing rights to $39 billion worth of Wells Fargo mortgages in January, but New York State banking regulators concerned about the growth of Ocwen’s servicing portfolio held up the deal, and the stock price tumbled.
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Medallion Financial
- Recommended by: Sam Stewart52-week range: $11.01 - $17.85Estimated earnings growth (3-5 years): 15.0%Price-earnings ratio: 10
- Medallion Financial (TAXI) is an even more specialized business. It finances taxi medallions, mostly in New York City. The stock has come under pressure because of concerns that services such as Uber and Lyft will take so much business from cab drivers that they’ll struggle to make loan payments. But a robust market for medallions is a good sign, says Stewart, and the loans, recently averaging just 40% of the value of a medallion, are conservative.
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NorthStar Realty Finance
- Recommended by: Sam Stewart52-week range: $8.34 - $18.78Estimated earnings growth (3-5 years): 0.0%Price-earnings ratio: 11
- NorthStar Realty Finance (NRF) is a real estate investment trust that owns commercial properties throughout the country, including manufactured housing communities and health care facilities. It also invests in commercial mortgages. Wall Street is having trouble figuring out the company, says Stewart, because it recently spun off its property-management business. Based on the new NorthStar’s expected dividend, the stock yields 10.7%.
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ZAIS Financial
- Recommended by: Sam Stewart52-week range: $15.62 - $19.15Estimated earnings growth (3-5 years): NAPrice-earnings ratio: 11
- ZAIS Financial (ZFC) is a pure mortgage REIT with a yield of 8.5%. ZAIS invests in securities backed by residential mortgages, both government-guaranteed and lower-quality fare. Stewart says investors are overstating the risk to the portfolio of both rising interest rates and potential defaults.
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- Recommended by: Bill Nygren52-week range: $421.91 - $615.05Estimated earnings growth (3-5 years):16.7%Price-earnings ratio: 21
- Bill Nygren co-manages Oakmark Fund (OAKMX), Oakmark Select (OAKLX) and Oakmark Global Select (OAKWX). He looks for growing businesses whose stocks trade for less than he thinks a company is worth and that are run by executives who put shareholders first. He’ll own a stock for years and tends to hold a relatively small number of stocks. “Most funds diversify to the point where successes don’t matter much,” says Nygren. “We want to maximize the stock-picking skill we bring to the table.”
Nygren also sees opportunity where few value-oriented managers dare to tread: fast-growing companies commanding premium stock prices, albeit smaller premiums than they deserve. “To us, buying great businesses at average prices is just as much value investing as buying average companies at cheap prices,” he says.
One such company is Google (GOOGL). It will benefit for years to come from the continuing shift of advertising from traditional to online media, Nygren says.
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Amazon.com
- Recommended by: Bill Nygren52-week range: $279.33 - $408.06Estimated earnings growth (3-5 years): 40.9Price-earnings ratio: 398
In a similar vein, Nygren isn’t put off by Amazon.com (AMZN) and its nosebleed, triple-digit P/E. He believes investors don’t value third-party sales on the site highly enough; they should count for more because they pose little risk or cost to Amazon. Making that adjustment and looking at share price relative to sales, “Amazon is much cheaper than the retailers that investors worry Amazon might drive out of business,” says Nygren.
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Bank of America, JPMorgan Chase, AIG
The hunt for good but undervalued companies frequently leads to controversial areas—in Nygren’s case, to financial companies. Many investors swore off the group after the last recession because of the difficulty of analyzing sometimes opaque businesses and a concern about onerous regulations that followed the financial crisis. The result, says Nygren, is the availability of some high-quality financials, including Bank of America (symbol BAC), JPMorgan Chase (JPM) and American International Group (AIG), at bargain prices. All trade at low price-earnings ratios, especially based on what Nygren expects the companies to earn once the lingering effects of the financial crisis stop weighing on their income statements.
- Bank of America52-week range: $13.60 - $18.03Estimated earnings growth (3-5 years): 8.0%Price-earnings ratio: 12
- JPMorgan Chase52-week range: $50.06 - $61.48Estimated earnings growth (3-5 years): 4.5%Price-earnings ratio: 10
- American International Group (AIG)52-week range: $45.94 - $56.10Estimated earnings growth (3-5 years): 11.8%Price-earnings ratio: 12
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More from Kiplinger
The hunt for good but undervalued companies frequently leads to controversial areas—in Nygren’s case, to financial companies. Many investors swore off the group after the last recession because of the difficulty of analyzing sometimes opaque businesses and a concern about onerous regulations that followed the financial crisis. The result, says Nygren, is the availability of some high-quality financials, including Bank of America (symbol BAC), JPMorgan Chase (JPM) and American International Group (AIG), at bargain prices. All trade at low price-earnings ratios, especially based on what Nygren expects the companies to earn once the lingering effects of the financial crisis stop weighing on their income statements.
- Bank of America52-week range: $13.60 - $18.03Estimated earnings growth (3-5 years): 8.0%Price-earnings ratio: 12
- JPMorgan Chase52-week range: $50.06 - $61.48Estimated earnings growth (3-5 years): 4.5%Price-earnings ratio: 10
- American International Group (AIG)52-week range: $45.94 - $56.10Estimated earnings growth (3-5 years): 11.8%Price-earnings ratio: 12
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