Saturday, June 2, 2012

Top Utilities Stocks With The Highest Upside Potential

The best-performing stocks in the market are usually those stocks with the highest growth rates or the highest expected growth rates. However, during the past 85 years, value stocks outperformed growth stocks by 39 basis points per month on average (see details here). Therefore, investors should still invest a certain amount of their money in value stocks rather than invest only in growth stocks. The reason why value stocks beat growth stocks is simple. Analysts usually estimate value stocks to have low or even negative growth rates, while they expect growth stocks to grow at higher rates for long periods of time, and such expectations are reflected in the stock prices. It is relatively easy for value stocks to beat the analysts' estimates. On the other hand, it is more challenging for growth stocks to beat the high expectations, and when they miss their estimates, they will fall like a rock. Netflix's (NFLX) 75% decline a few months ago is a good example of this.

Below, we ranked US utilities companies based on their expected five-year growth rates. All companies have at least $7 billion market cap. The data is sourced from Finviz. Contrarian investors should focus on the stocks that are at the top of the table. We also like stocks with high expected growth rates and low P/E ratios.



Forward P/E

EPS growth


Ameren Corporation




Entergy Corporation




Exelon Corporation




Public Service Enterprise Group Inc.




PG&E Corp.




FirstEnergy Corp.




Edison International




DTE Energy Co.




American Electric Power Co., Inc.




Consolidated Edison Inc.




Progress Energy Inc.




Duke Energy Corporation




Dominion Resources, Inc.




Xcel Energy Inc.




PPL Corporation




CenterPoint Energy, Inc.




Constellation Energy Group, Inc.




NextEra Energy, Inc.




Southern Company




Sempra Energy




Wisconsin Energy Corp.








The AES Corporation




EQT Corporation



It seems that Ameren Corporation (AEE) has the highest upside potential among large-cap US utilities stocks. Analysts estimated Ameren's EPS to decline by 0.05% per year over the next five years. Therefore, as long as the earnings of the company did not decrease, it will beat the analysts' expectations. The utility holdings company reported net income of $285 million for the third quarter of 2011, compared with $167 million net loss for the same quarter of 2010. AEE has a market cap of $7.6B and a forward P/E ratio of 13.47. During the third quarter, Jim Simons' Renaissance Technologies significantly boosted its AEE stakes by 102%. As of September 30, 2011, the fund had $30 million invested in AEE.

Entergy Corporation (ETR) also has high upside potential. It is expected to grow at only 0.20% annually over the next five years, which is relatively easy to beat. Entergy is mainly engaged in the production of electric power and the distribution of retail electric. It reported net income of $633 million for the third quarter of 2011, up from $498 million for the same period a year ago. ETR has a market cap of $12B and a forward P/E ratio of 11.75. As of September 30, 2011, Jean-Marie Eveillard's First Eagle Investment Management had $215 million invested in ETR. Cliff Asness' AQR Capital Management also invested $27 million in this position at the end of September.

Another large-cap utilities stock with potentially high upside potential is Exelon Corporation (EXC). The company reported third-quarter net income of $601 million in 2011, compared with $845 million for the same quarter a year earlier. EXC has a market cap of $26B and a forward P/E ratio of 12.9. As of the end of September 30, 2011, there are 23 hedge funds disclosed to own EXC in their 13F portfolios. For example, Jim Simons' Renaissance Technologies initiated a brand new $64 million of EXC over the third quarter. Steven Cohen's SAC Capital Advisors also invested $51 million in the stock at the end of September.

The stocks at the bottom of the list, such as EQT (EQT) and ONEOK (OKE), have relatively large forward P/E ratios. Both stocks' forward P/E ratios are greater than 20. There are some exceptions, though. For example, AES (AES) has a forward P/E ratio of 9.88, the lowest among stocks listed above. Stocks at the top of the list have relatively low forward P/E ratios. The top 10 stocks on the list all have forward P/E ratios of lower than 16, indicating that they are very likely to be trading at discounts. We encourage investors to focus on these utilities stocks with the highest upside potential and do some in-depth research on these stocks.

Disclosure: I am long (FE), (PEG).

Netflix Surge: Is Now a Good Time to Buy?

The king of home DVD delivery and streaming video to almost every entertainment device available has rallied in recent weeks, reaching a 52 week high just yesterday. Running from $49.13 a share to $66.65 a share yesterday, earnings and the stock’s price to earnings both look decent at this time.

The recent news that Warner Brothers movies will not be available through Netflix (NFLX) or kiosk chain Redbox for 28 days after a DVD’s release has not affected the stock price in recent weeks. The two distributors will wait on making new releases available to improve the studio’s profits on sold movie DVDs. They also agreed to destroy the DVDs after they are no longer widely rented instead of selling them to the public.

Netflix beat earnings expectations for the fourth quarter by roughly 25% and has nice revenue and earnings growth. Revenue growth is near 25% for the coming quarters with earnings growth at 46% this quarter and at 26% next quarter. Analysts increased their expectations within the past 30 days for the quarter earnings from 45 cents a share to 54 cents a share, thus sparking the recent increase in share price.

The price to earnings (P/E) is at 33 with the stock price near $65 at the close yesterday. This is slightly lower than the 46% earnings increase but higher than next quarter's 25% expected increase. If analysts nudge their expectations higher again, the stock should move accordingly. Look for this increase as a chance to buy or look for a slight sell off for your chance to trade the stock long.

Disclosure: No positions

Enterprise Software: Awaiting An Outbreak Of Merger Mania

Nothing gets the Street’s juices flowing like speculative chatter about M&A.

Ergo, there’s lots of discussion this morning about a new report from FBR Capital analyst David Hilal about the prospects for consolidation in the enterprise software sector. He thinks the flow of M&A deals in the group is going to accelerate this year and into 2011. “Software vendors are flush with cash given the cash-flow rich nature of the software model and more than a handful of vendors have even recently raised additional capital,” he notes.

Hilal even provides eight specific deals he thinks would make strategic sense:

  • Akamai (AKAM) buys Limelight (LLNW), thus strengthening their position in content delivery networks.
  • American Express (AXP) buys Concur (CNQR), provider of expense management software; he ntoes tha the company’s already have a tight partnership.
  • Hewlett-Packard (HPQ) buys McAfee (MFE): This one has already turned into a rumor; the theory is that it would strengthen HP’s hand in security software.
  • Oracle (ORCL) buys Red Hat (RHT), thus extending its reach into the Linux software market.
  • Oracle buy AthenaHealth (ATHN), building on its recent acquisition of Phase Forward to further pursue the health care segment.
  • (CRM) buys RightNow (RNOW), expanding beyond sales force automation software into customer service and support software.
  • SAP (SAP) buys Tibco (TIBX), boosting the German software giant’s middleware stack.
  • SAP buys Informatica (INFA), in another boost to the company’s software stack.

He then goes on to suggest even more potential deals:

  • Automatic Data Processing (ADP), he says, could buy Concur.
  • Oracle could buy Amdocs (DOX), Ariba (ARBA), Manhattan Associates (MANH) and/or Parametric Technology (PMTC).
  • SAP could buy
  • Microsoft could buy Citrix (CTXS) or Limelight.
  • Google could buy Salesforce or Akamai.
  • AT&T or Verizon could buy Akamai.
  • Cisco could buy Riverbed.
  • Microsoft or Google could� buy Nuance (NUAN).

Among the targets noted in the above list:

  • Limelight is down 16 cents, or 4%, to $3.83.
  • Concur is up 20 cents, or 0.5%, to $43.24.
  • McAfee is up 50 cents, or 1.3%, to $40.63.
  • RedHat is up 5 cents, or 0.2%, to $31.51.
  • AthenaHealth is down 2 cents, at $37.08.
  • RightNow is up 8 cents, to $18.91.
  • Tibco is up 13 cents, or 1.2%, to $11.48.
  • Informatica is up 5 cents, or 0.2%, to $25.78.

5 High Yield Stocks That Can Keep Paying Big Dividends

In this article I have chosen five stocks based off their high dividend yields, pay-out ratios and growth prospects for future on a relative value basis. While investors love dividend stocks these days, however they should consider a company's ability to maintain a high dividend yield in coming years too. Add cheap valuations to high dividend yielding stocks with sustainable outlook, and one gets a formula for outperforming markets indices. Here is my analysis on such stocks.

Pitney Bowes, Inc. (PBI) is an equipment and mail solutions provider. Shares of the company are currently trading around $19 per share. Over the last 52 weeks, its shares have traded within a narrow range of $17.33 and $26.36 per share. The company has a beta of 1.16, indicating that its stock is volatile in nature. The company has a relatively high dividend yield of 7.6%.

Siemens AG (SI) is a competitor of Pitney Bowes and it currently has a price-to-earnings ratio of 10.7 times versus the 9.3 times reported by Pitney Bowes. It also has a higher price-to-sales ratio of 0.9 times versus the 0.7 times reported by Pitney Bowes. These values show that Pitney Bowes is a relatively cheaper company to invest in. Xerox Corporation (XRX) is another competitor of Pitney Bowes. Siemens and Xerox Corporation reported dividend yields of 3% and 1.9% respectively, both of which are lower than that of Pitney Bowes. The performance by Pitney Bowes shows that the company has a lot of potential but needs to work on its revenue stream in order to maintain its high-yielding dividends.

Penn West Petroleum Ltd. (PWE) is an explorer and exploiter of petroleum and natural gas. Shares of the company are trading around $22 per share and have traded between $12.45 and $28.98 per share over the last 52 weeks. The company has a beta of 1.44, indicating that its shares are volatile in nature. Penn West reported a dividend yield of 5%.

Anadarko Petroleum Corporation (APC) is a competitor of Penn West. Anadarko currently has a higher five year expected price-to-earnings growth ratio of 0.9 times versus the 0.5 times reported by Penn West, showing that the future earnings growth of Penn West can be bought at a lower price. Suncor Energy, Inc. (SU), another competitor of Penn West, and Anadarko both have lower dividend yields of 1.3% and 0.5% respectively. Penn West currently has one of the best positions in the Canadian Oil Market, with more than 97% of analysts believing that the company will outperform the market. This is due to the high oil prices and the company's relatively improved performance. We are bullish on Penn West's performance.

Companhia Energetica De Minas Gerais ADS America (CIG) is a provider of electric energy in Brazil. The company's shares are currently trading around $19 per share. Over the last 52 weeks, its shares have traded within a narrow range of $14.03 and $21.09 per share. The company has a low beta of 0.66, indicating that its stock is not volatile in nature. The company also reported a return-on-equity of 19% and a dividend yield of 5.5%.

El Paso Electric Company (EE) is a competitor of Companhia Energetica. El Paso's current price-to-earnings ratio of 13.8 times is higher than that of Companhia Energetica at 9.8 times. El Paso and Companhia Paranaense de Energia (ELP), another competitor, reported lower dividend yields of 2.5% and 0.9% respectively. Companhia Energetica recently traded at eight times earnings and is doing better than its U.S. based counterparts. The company also recently improved on its two hundred day moving average and is considered one of the better performing Brazilian stocks. We are bullish on the company's stock.

Duke Realty Corporation (DRE) is a real estate investment trust. Shares of the company are currently trading around $13 per share and have traded within a narrow range of $9.29 and $15.63 per share. The company has a beta of 1.84, indicating that its shares are volatile in nature. Duke Realty reported a dividend yield of 5.1%.

Highwoods Properties, Inc. (HIW) reported a higher five year expected price-to-earnings growth ratio of 3.7 times versus the 3.4 times reported by Duke Realty. Highwoods also has a higher price-to-sales ratio of 4.9 times versus the 2.3 times reported by Duke Realty. These ratios indicate that Duke Realty is cheaper for investors. Another competitor of Duke Realty is Acadia Realty Trust (AKR). Acadia also has a higher price-to-sales ratio of 4.9 times. Acadia reported a dividend yield of 3.5%, which is less than what is offered by Duke Realty. It has a 2.1 analyst recommendation on a scale where 1.0 is a "Strong Buy" and 5.0 is a "Sell". It is expected to earn around $230 million in revenue this quarter. We are bullish on the performance of Duke Realty.

Provident Energy Ltd. (PVX) is a marketer of natural gas liquids. Shares of the company are currently trading near yearly highs at $11 per share. Over the last 52 weeks, its shares have traded between $6.90 and $11.44 per share. The company reported a return-on-equity of 23%. It has a beta of 1.25, indicating that its shares are volatile. Also, Provident Energy has a dividend yield of 4.8%.

Baytex Energy Corporation (BTE), a competitor of Provident Energy, reported a higher price-to-sales ratio of 6.7 times, versus the 1.6 times reported by Provident Energy. Another competitor of Provident Energy, namely Abraxas Petroleum Corporation (AXAS), also reported a higher price-to-sales ratio of 5 times. This shows that Provident Energy is cheaper than its competitors. Abraxas currently does not pay dividends while Baytex has a slightly lower dividend yield of 4.6%. Provident's expected acquisition by Pembina Pipeline (PBNPF) will likely raise the shares for both companies. Provident has been given a buy rating by analysts and with the company's positive performance, we reinforce the buy rating.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Big Oil: Growth Strategies and Potential Snags

Major International Oil Companies (IOCs) have over the past decade grappled with growth challengesparticularly, the increasing difficulty to reserves addition and profitability. Increasing resource nationalism among oil-rich countries has seen major IOCs’ share of global reserves shrink from about 85% in the late 1960s to less than 17% at present. In addition, available oil and gas acreages have in the main, moved to the more geologically and technologically — and therefore more financially — challenging terrains. In 2009, even when global crude oil prices doubled, most of these IOCs reported severe reduction in earnings, some as much as 70%, due primarily to weak global crude oil demand.

The IOCs’ ability to manage such growth challenges will most likely determine their viability, a key concern for investors. Several crucial strategies for growth have been employed by the companies and a brief sampling of their performances with respect to these strategies is quite informative:

1. Joint Venture

Oil and gas acreages in resource-rich countries are increasingly being domiciled with their National Oil Companies (NOCs) as well as indigenous oil companies. One access route for IOCs to such acreages is through joint ventures with these NOCs and indigenous companies. The synergy brings IOCs’ advanced industry technologies together with NOCs’ vast acreage and financial resources (as in the case of China) as well as lower overhead costs (personnel and matériel). The recent joint venture between BP and OAO Rosneft, one of Russia’s NOCs is expected to explore for oil and gas in Russia’s vast Arctic acreages which are domiciled principally with the state. Though bogged down by legal disputes, it involved a swap of 9.5% share in Rosneft for a 5% share in BP.

According to the energy consulting firm, PFC Energy, among Integrated IOCs, TNK-BP, the joint venture between BP and a Russian indigenous oil consortium had the highest year-on-year (YoY) share price gain in 2010 with 58%. In comparison (Figure 1 below), the second-highest [Conoco Philips (COP) and Cenovus (CVE)] were two non-joint venture companies which at 33%, were 25 percentage points lower; of the seven largest Integrated IOCs by market capitalization, three (BP, Total and Eni) recorded share price declines while two [Royal Dutch Shell (RDS.A)and ExxonMobil (XOM)] had only single-digit increases. TNK-BP also led the previous year’s rankings with a 165% gain.

2. Divestment and Organic Growth

The performance of some subsectors of the oil and gas activity spectrum has been of great concern to Integrated IOCs; in comparison for example, oil and gas companies engaged strictly in Exploration and Production (E&P) recorded significantly higher share price gains (YoY) in 2010 than most of the Integrated IOCs.

Some Integrated IOCs in their restructuring-for-growth strategy opted to shed non-performing and non-core assets; for BP, the exigencies of the Macondo well incident added poignancy to this option while ExxonMobil in the main, has favored divestment of only those assets for which it can get premium prices.

ConocoPhilips which held substantial net proceeds from a US$15 billion divestment program between 2009 and 2010, according to reports recently raised its quarterly dividend by 20% while detailing a capital expenditure (capex) program of US$13.5 billion for the current year. Its organic reserve replacement ratio for 2010 was reportedly 138%. Of the seven largest Integrated IOCs by market capitalization, it had by far the highest share price gain (YoY) for 2010 with 33%. The company’s growth strategy is being regarded by some analysts as the paradigm (although it may still be early in the day).

Chevron has embarked on an aggressive capacity expansion and some of the projects are expected to start yielding substantial returns even sooner. It has put capex for the current year at about US$26 billion, a 20% increase over the previous year. This translates to between 74% and 100% of ExxonMobil’s projected capex figures — which according to reports are between US$26 billion and US$35 billion — and that, with only about half the market capitalization of ExxonMobil. Its share price gain for 2010 was 19%, the second-highest among the seven largest Integrated IOCs by market capitalization.

3. Acquisition

According to the energy research and consulting firm Wood Mackenzie, total global spending for upstream mergers and acquisitions was US$183 billion in 2010, driven largely by unconventional resources and restructuring among Integrated IOCs.

Shell and Total (TOT) made notable acquisitions last year but one of the most notable over the last two years has been ExxonMobil’s of XTO. The synergies included XTO’s vast unconventional natural gas resources and ExxonMobil’s massive financial muscle as well as operational capabilities.

ExxonMobil just reported a reserves replacement ratio of 209% according to Platts, and in terms of barrels of oil equivalent, unconventional natural gas accounted for 80% of that. Massive supplies in the U.S. have kept natural gas prices down and that has in the short term limited the returns on that acquisition. The bet however is for the medium to longer term when a possible change in energy profiles would see much higher natural gas prices. ExxonMobil’s bids for conventional reserves addition in the large Brazilian and Ghanaian offshore acreages have been largely unsuccessful, though parts of the Brazilian acreages are being re-evaluated. The company reported a 7% share price gain (YoY) for 2010.

All said then, three quick points are noteworthy:

First, the success of any growth strategy is not just about a snapshot of share price changes or earnings or the likes, though to many an investor, these often constitute the bottom line. Certain restructuring programs by their very nature may take a few more years than others to bring in desired results; such results when they kick-in, may even entail much higher and sustained growth than others.

Secondly, companies may employ a combination of these growth options and are defined by one, only to the extent that that one holds prominence.

Finally, even with these growth strategies, IOCs still face substantial challenges with respect to reserves growth. Resource nationalism means that these IOCs would still rely — and with the attendant risks — on the same resource-rich countries for access to reserves, whether through joint ventures or the good old (but increasingly less profitable) production sharing contracts and service contracts. Many of these IOCs have had torrid times with host communities or countries (though it must be added that in some cases, they themselves had shirked on their Corporate Social Responsibility, CSR, obligations). The nationalization of IOCs’ petroleum assets under Hugo Chávez in Venezuela typifies such associated risks. Shell’s travails in Nigeria’s Niger Delta region, ExxonMobil’s frustration with the Ghanaian government over the Jubilee assets and BP’s earlier faceoff with the Russian establishment over their joint venture, are further examples. Some IOCs however, have become more adept than others at both crises and relationship management, vital factors in current corporate growth strategies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The Retirement Rule of Thumb

When in doubt, resort to the rule of thumb. 

It isn’t the ideal way to make investment choices, but it is, unfortunately, what most people on the verge of retirement do, says Alessandro Previtero, an assistant professor of finance at the Richard Ivey School of Business at the University of Western Ontario. Previtero’s research has shown that when faced with the choice between a lump sum and an annuity, individuals typically base their decision on stock market returns, and will more often than not opt for a lump sum if stock market returns have been good for the period preceding their retirement.

What’s most worrying for Previtero is that the relationship between stock market returns and annuities grows stronger with age, thereby indicting that older people tend to rely more on rules of thumb to make complicated decisions as they age. This is something, he says, that advisors have to take into account when they’re discussing lump sums versus annuities with their clients.

“If we try to put this into practice, an advisor needs to be very sensitive about stock market performance, and they have to speak openly with their clients about why they’re choosing to invest in equities, whether they’re choosing to do so because it is the right thing to do or because they see that the equity market is coming out of a positive trend,” Previtero says. “It’s very important for advisors to see what’s driving clients to choose lump sum or equities and to understand their underlying behavior. It’s even more important for advisors to pay attention to behavioral biases and potential mistakes that investors may make because if someone has made the wrong decision based on a rule of thumb, it can also mean that the relationship they have with their advisor can potentially sour.”

Granted, annuities are a complex beast, difficult to explain and understand, even in recent years, when there’s been a concerted effort by the retirement finance industry to shed greater light on them and clear them of their tainted past. Annuities experts believe that the evolution of the industry will engender different kinds of products that would allow retirees to take advantage of stock market upside, and that they would be more readily available in retirement plans.

Nevertheless, it is still important for advisors to have the dialog with their clients as to why or why not to choose an annuity, says Jeffrey Brown, William G. Karnes professor in the department of finance at the University of Illinois at Urbana-Champaign and director of the Center for Business and Public Policy in the College of Business. The conversation, he says, has to begin with what a client wants in their retirement and introducing in that context the idea of guaranteed lifetime income.

Brown and other academics like Julie Agnew, associate professor of economics and finances at the College of William and Mary, have done extensive work in the area of framing, an approach that can perhaps help advisors give better direction to the annuities conversation and enable both themselves and their clients to better understand the reasons why they should or shouldn’t invest in annuities.

Brown conducted a survey in which he first presented annuities as an investment choice, the classic way in which they are almost always presented. He then changed things around by reframing annuities in a consumption-related framework.

“In half the sample, we described the product – which we didn’t name – by using terms like ‘investment’ and ‘returns,’ and in the other scenario, we talked about the amount of income that this product would yield,” Brown says. “In the first context, people thought annuities were inferior and only 20% said the product was a better choice compared to savings account. In the second scenario, though, after simply changing the terms of the discussion to words like ‘consume,’ ‘spend’ and so forth, 70% of the people in the survey preferred the annuity.”

The subtle change in wording, which resulted in people looking at annuities in terms of what they want to consume and spend in retirement, led to a total change in mindset.

“We’re doing more research on consumption-related frameworks because we think that if we take this a little further, we’d be part of a much-needed and fundamental rethinking in how we talk about retirement planning,” Brown says.

Framing the retirement conversationin a consumption-related context also leads onto other very important issues, such as inflation, long-term care, and whatever else people might need to maintain their standard of living. These elements are all part of a different conversation from the one that focuses on maximizing wealth, Brown says, and within that context advisors can help their clients to better see the benefits and downsides of the options they have, including whether to put their money in the stock market or in annuities, and to perhaps go beyond resorting to simple rules of thumb.

Three degrees of Reid Hoffman

FORTUNE -- One day last fall, Reid Hoffman, the social networking guru and founder of LinkedIn (LNKD), woke up at the MGM Grand in Las Vegas, where he breakfasted with Magic Johnson and then spoke to a few hundred HR professionals. On a flight to San Francisco he scarfed down a turkey sandwich while I quizzed him, then sat for the closing interview at the Web 2.0 Summit. While catching up with friends in the greenroom, he took a call from a board member. Next: dinner with Microsoft (MSFT, Fortune 500) CEO Steve Ballmer and guests before -- finally -- retiring to his Palo Alto home. This, says Hoffman, is pretty much a normal day. "I don't know what the opposite of a sociopath is," says his close friend, investor and PayPal veteran Peter Thiel, "but he is that."

Hoffman, 44, is a polymath with degrees from Stanford (symbolic systems) and Oxford (philosophy). But he owes his success to his ability to navigate the ever-expanding group of people he calls his tribe. His MO is making time for people because their ideas are interesting rather than potentially profitable; he is quick to offer favors for friends. In 2007, when Bret Taylor launched Friendfeed, the company he sold to Facebook, Hoffman offered him detailed feedback on his product strategy. "He sets an example for how entrepreneurs should help each other," says Taylor, now Facebook's CTO.

Hoffman's ability to both grasp technology changes and connect on a deeply human level has made him one of Web 2.0's biggest winners. He started the very first social networking website,, back in 1997 when Mark Zuckerberg was still in middle school. He later helped broker Facebook's first $500,000 investment (kicking in $40,000 of his own). He founded LinkedIn when the idea of sharing your little black book was career suicide; now it has 135 million users. And he has had a hand in nearly every other big Web 2.0 company, including Friendster, Digg, and Zynga (ZNGA).

In 2009, Hoffman joined venture firm Greylock, where he runs a seed fund and helps manage a portfolio of nearly 100 companies, including Groupon (GRPN), Tumblr, and AirBnb. With LinkedIn's IPO and other investments, Hoffman is worth some $1.5 billion. Now comes his book, The Start-Up of You, in which he shares tips on building a great career. Paramount among them: being an authentic networker. After all, Hoffman has 800 Facebook friends and 2,579 LinkedIn connections, and sits on six corporate and four nonprofit boards. At meetings he spreads out no fewer than five screens -- iPads, Androids -- to keep up with contacts. That skill has helped Hoffman recruit to Greylock such web stars as former Mozilla CEO John Lilly. Hoffman now believes that the defining principle of the web's next innovation cycle is data. "We are generating a massive amount," he says. "What are we inventing?" It's one of the first questions he asks everyone he meets. The other: "How can I help you?

This article is from the February 6, 2012 issue of Fortune. 

Money Morning Midyear Forecast: The U.S. Economy is Headed For a Second-Half Slowdown

Most textbook economists say that the U.S. economy is engaged in a broad-based recovery.  But while there's a consensus that there's no "double-dip" recession on the horizon, the evidence suggests the nation's economy is headed for a slowdown in the second half of 2010.

The reason: In a market that derives 70% of its growth from consumer spending, the last half of this year will be all about those consumers - and about the economy's inability to generate enough jobs to keep the nation's cash registers ringing.

If you add to that concern the end of the various government stimulus efforts, possible fallout from the Eurozone debt contagion, and oil in the Gulf of Mexico defiling the shores of four states, you end up with an economic outlook that's clouded with uncertainty.

And that uncertainty will continue to stifle hiring and will result in another round of consumer belt-tightening - and a continued economic malaise.

"The fact remains that the U.S. economic recovery stands on shaky ground and the probability for a slowdown appears real for the second half, as evidenced by the recent spate of weak economic data such as high initial jobless claims, low non-farm payrolls, and anemic retail sales figures," said Money Morning Contributing Writer Jon D. Markman.

As Consumers Go, So Goes the Economy

The U.S. economy grew at a 2.7% annual rate in the first quarter, less than previously calculated, reflecting a smaller gain in consumer spending. That's less than half the 5.6% growth in gross domestic product (GDP) the U.S. market experienced in the fourth quarter of 2009.

Economists are forecasting stronger growth - 3.8% on an annualized basis - in the second quarter, which ends Wednesday. But big questions remain about prospects for the second half of the year.

The biggest question of all is whether or not the U.S. consumer will be able to stay strong in the face of high unemployment.

Consumer spending rose at a 3% annual rate in the first quarter, down from the previous 3.5% estimate. And it's getting worse.

Retail sales plunged in May by the largest amount in eight months as consumers slashed spending on everything from cars to clothing, according to the U.S. Commerce Department. Total spending fell a whopping 1.2%, as even such discounting stalwarts as Wal-Mart Stores Inc. (NYSE: WMT) got the cold shoulder.

When the U.S. economy is at its strongest, consumer spending accounts for as much as 70% of the nation's growth. So there's little chance for the economy to get up off the mat until shoppers open their wallets and loosen their purse strings. In fact, because consumer spending is such a potent economic catalyst, it acts as a leading indicator of growth - similar to the manufacturing and purchasing indexes. The chart below shows how changes in consumer spending patterns often presage changes in economic growth patterns.

Right now, consumer spending is trending down, which means we're likely headed for an economic slowdown - at the very least.

In the worst-case scenario, the United States could be headed for a dreaded double-dip recession.

GDP Growth Not Enough to Stimulate Hiring

During normal times, growth in the 3% range would be considered healthy. But the country is coming out of the longest and deepest recession since the Great Depression.

Economists say it takes about 3% growth to create enough jobs just to keep up with the population increase. Growth would have to be about 5% for a full year just to drive the unemployment rate down by one percentage point.

So economic growth needs to be a lot stronger - two or three times the current pace - to make a big dent in the nation's 9.9% unemployment rate.

A scant 431,000 jobs were added in May, according to the U.S. Labor Department. That was well below Wall Street's expectation of 513,000. Worse, a whopping 411,000 of those jobs came from U.S. Census hiring, which means that a full 95% of the jobs added in May were temp positions.

And even though the four-week average of Americans filing for jobless benefits declined slightly to 463,500 in the week ended June 18, it is still about 10,000 higher than last month.

Claims at a level of roughly 450,000 are consistent with private companies adding about 100,000 jobs a month, JPMorgan Chase & Co. (NYSE: JPM) chief economist Bruce Kasman said in a note to clients. That is fewer than the 116,000 a month average growth in the five years to December 2007, when the recession began.

Initial claims would have to average 425,000 to 430,000 each month for private payrolls to rise by the 175,000 a month that JPMorgan economists are forecasting for the second half of the year, Kasman wrote.

It takes 150,000 jobs to the plus side just to tread water.

"The labor market is not improving," Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. (NYSE ADR: MFG) in New York told Bloomberg News. "If you really are going to have a sustainable recovery, you need the labor market to improve."

High Unemployment Hamstrings Moribund Housing Market

Along with consumer spending, the housing market is another one of the main drivers of the U.S. economy. Construction jobs, lumber and other materials account for about 6% of GDP.

In fact, the housing-market bubble was directly responsible for the economic expansion of the early part of the decade - when loose lending overextended credit for questionable home loans. Homeowners used their houses as virtual ATM machines, cashing in their home-equity lines to buy cars, furniture, clothes, swimming pools and expensive vacations, such as cruises.

But weakness in that same housing market has now given the economy a migraine headache that's impervious to such typical remedies, including low interest rates and government-stimulus programs.

Simply put, the country has too many houses and too many homeowners in trouble.

  • Foreclosures are expected to climb to 4.5 million this year from 2.8 million in 2009, according to RealtyTrac Inc., an Irvine, California-based research firm.
  • An alarming total of 11.2 million homes are underwater, and an additional 2.3 million mortgages have less than 5% equity.
  • And there are now 2 million vacant homes for sale - double the historical level, according to the U.S Census Bureau.
About 7 million homeowners are behind on their mortgages, and that number is on the rise. The delinquency rate for mortgage loans on residential properties increased to 14% of all loans outstanding in the first three months of the year, according to the Mortgage Bankers Association (MBA).

The serious delinquency rate - the percentage of loans that are 90 days or more past due or in the process of foreclosure - was 9.54%. The cure rate for these loans is less than 1%.

So, out of a total U.S. mortgage debt of about $10 trillion, there is a contingent liability of nearly $1 trillion hanging over the U.S. banking system like a financial sword of Damocles.

No wonder the banks aren't that eager to lend money...

And, if not for the nationalization of the mortgage market, housing literally could have gone over the cliff by now.

Instead, the Federal Housing Administration (FHA), Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE) have financed more than 90% of U.S. home mortgages since the market for mortgage bonds without government-backed guarantees collapsed.

For the first time ever, the FHA backed more loans than Freddie and Fannie combined. That is especially troublesome, given that the FHA backs loans with down payments of as little as 3.5%.

"This is a market purely on life support, sustained by the federal government. Having FHA do this much volume is a sign of a very sick system," FHA Chief David Stevens told a conference at the MBA.

After the Federal housing credit for mortgages expired at the end of April, mortgage applications plummeted 40%, leading some analysts full circle to the only solution.

"Ultimately, you're going to need job growth to see a sustainable recovery in housing," Scott Brown, chief economist at Raymond James & Assoc. Inc. (NYSE: RJF) in St. Petersburg, Florida, told Bloomberg.

Tepid Economic Growth For Second Half of 2010

At this point in the economic cycle, it's all about jobs.

After a two-decade debt binge, U.S. consumers have basically reached the exhaustion point. And since more than two-thirds of U.S. GDP revolves around consumers making purchases, it'll be nearly impossible to grow the economy out of this mess as long as employers hold back on hiring.

Top it off with troubles in Europe and an oil spill that could cost upwards of 80,000 jobs in the U.S. Gulf-region states, and you have an economy that will do well to crank out 3% growth for the rest of 2010.

For now, a lack of job creation will continue to put pressure on U.S. housing prices, the nation's banking sector, and the U.S. economy.

"There had been too much enthusiasm that the recession was over," Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group, which manages $9 billion, told Bloomberg. " It's very noticeable that there has been a scale-back in expectations. The vigor of the recovery has moderated."

News & Related Story Links:

  • Money Morning News Archive: Midyear Economic Forecast Stories.
  • Money Morning: Four Factors to Consider Before Determining Your Long-Term View on U.S. Stocks
  • Bloomberg: Housing Market Threatens U.S. Recovery as Sales Slide
  • Bloomberg: Jobless Claims in U.S. Unexpectedly Rose Last Week
  • Bloomberg: FHA Home-Financing Volume Sign of �Very Sick System'
  • Bloomberg: Sales of U.S. Existing Homes Fall as End of Tax Credit Looms
  • Money Morning:Unexpected Drop in Retail Sales a Sign of Trouble For Economic Recovery
  • Money Morning: Stubbornly High Unemployment Shows U.S. Economy Still Plagued by "Jobless Recovery"
  • Money Morning:
    Surge in Strategic Defaults Threatens Housing Market Recovery
  • Silver Crest Asset Management Group: Official Website.
  • Investopedia: Double-Dip Recession.
  • Money Morning: Are You Worried About Stocks? The U.S. Housing Market Should Be Your Real Concern

The new new gold rush

NEW YORK (CNNMoney) -- The market is off to a scintillating start in 2012 and many of last year's worst performers are leading the charge.

Europe debt worries seem to be dissipating a bit, helping the the euro bounce back. And investors are dumping stodgy Treasury bonds, pushing yields higher in the process. Risk is back.

So why is gold, the quintessential safe haven/fear trade, up about 7% in 2012 too? That's about the same as the Nasdaq.

You can probably thank the world's central bankers for helping fuel a gold rush. The funny thing about gold is that it often rallies when investors are terrified about deflation. But it also moves higher when investors start anticipating inflation.

And nothing cries out inflation like printing dollars (and euros) to try and halt a global crisis.

The Federal Reserve has been buying bonds for awhile to keep long-term interest rates low. Its latest means of doing so, a program dubbed Operation Twist that swaps short-term bonds for longer-term Treasuries, is slated to end in June.

And now the European Central Bank is also doing its part. Many investors credit the ECB's decision last December to allow banks to take out 3-year loans at a rate of just 1% for boosting confidence in Europe.

Demand for this program has been strong, and it seems that some banks have been using the proceeds to buy up the sovereign debt of distressed nations like Italy and Spain.

Gold: No guaranteed returns

Now you might be wondering why I've mentioned inflation so much. So-called core prices for consumer goods were up just 2.2% in the U.S. over the past 12 months. Inflation isn't an issue in Europe either.

But the market is focusing on the future. And as long as the Fed and ECB are in crisis management mode, it's likely that all the money that's sloshing around will eventually fuel inflation. That is bullish for gold, which is a classic way to hedge inflation since it is not a paper currency. It has tangible value.

"The only condition that matters for gold is if inflation expectations are rising. Since the first week of this year, there has been a dramatic repricing of inflation expectations," said Michael Gayed, chief investment strategist with Pension Partners LLC, an investment advisory in New York.

Gayed said that there's no reason why the recent trend of gold and stocks rallying in tandem can't continue as long as central banks keep taking serious steps to tackle the debt problems.

"Between the ECB's blank check and the Fed's Operation Twist, investors feel that the worst of the crisis may be averted. So gold can do well just like stocks," he said.

But the run-up in gold may not just be about the Fed and the ECB. Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management, an investment advisory firm in Parsippany, N.J., said that recent data from China -- which hints that country's economy may not crash this year -- is helping too.

"A large part of the run in gold is because of the market's perception that China will have a soft landing. That should be bullish for many commodities," Mahn said, pointing out that silver and copper have outperformed gold so far this year.

Of course, one of the reasons that China is expected to have a soft landing is that it too is starting to contribute to what I've called The Great Global Easing. China's central bank lowered its reserve requirement ratio for lenders in November. Many experts think an interest rate cut could come soon.

Gingrich: U.S. should reconsider gold standard

So as long as central banks around the world are fearful of letting Europe's woes spill over to their shores and continue to act accordingly, gold could head higher.

"Gold is being driven by monetary policy. Japan is easing. China is starting to loosen," said Bob Gelfond, CEO of MQS Asset Management, a global macro hedge fund based in New York. "Almost every major country across the world is easing. We are going to be in this environment for a while."

But how much higher can gold really go? The metal's upside may be limited. It is currently trading around $1,675 an ounce, about 13% below its all-time (but not inflation-adjusted) high of near $1,925 an ounce last September.

Oliver Pursche, co-manager of the GMG Defensive Beta Fund (MPDAX) in Suffern, N.Y., said that economic data has to get better around the world (including China) before inflation expectations can lead to actual inflation.

"Gold should continue to rise slowly. But the story from inflation hawks for the past two years is that all the money printing will create inflation. The reality is that overall consumer demand is soft," Pursche said.

"Over time, there will be an inflation impact. But gold won't make new highs until real inflationary pressures take hold," he added.

Best of StockTwits and name that tune shout-out!: Research in Motion (RIMM) has a new CEO to replace the two that investors hated. Unfortunately for the BlackBerry maker, it seems that investors don't like the new one either.

mohannadaama: New $RIMM CEO is two old Co-CEOs put into one. Same product but under a different label. Market is not buying into it.

AronPinson: If CEOs step down b/c strategy isn't working... Why bring in a new person implementing the same strategy? $RIMM

I think investors really wanted new blood. That might have been better. Then again, an outsider didn't work so well for Yahoo (YHOO, Fortune 500) with Carol Bartz (jury still out on Scott Thompson obviously) or Leo Apotheker with HP (HPQ, Fortune 500), right?.

jfahmy: The only way the new $RIMM CEO can help his company is if he started selling iPhones $AAPL

Or Android devices.

ericjackson: Has a CEO ever had a more embarrassing first day on the job? From +5% to -7% based on 30 mins of chat. $RIMM

That is terrible. Market was happy about a new CEO and then disappointed when he started talking on the conference call. To quote one of my favorite Billy Joel tunes ("Summer, Highland Falls") it's either sadness or euphoria with RIM.

And speaking of favorite songs, I challenged readers to another silly name that band contest today.

I noticed that PetMed Express (PETS), a pharmacy for cats and dogs, was surging on strong earnings. So I asked followers to ID the band behind this song lyric, which includes the company's ticker symbol. "We'll make great $PETS. We'll make great $PETS!"

James Holt is the winner for pointing out that the band was Porno for Pyros. He added that he liked their song "Tahitian Moon" better than "Pets." I agree. Then again, I also like the band that Perry Farrell is more famous for -- Jane's Addiction -- better. "Been Caught Stealing" could be Wall Street's theme song.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. 

The Top 100 Mutual Funds

Inside the February Issue
  • The Top 100 Mutual Funds
  • Attack of the Fine Print
  • Can These People Teach Financial Planning?
  • 10 Things Customer-Service Reps Won't Say

If past performance is any indication of future returns, it's not surprising that investors are skeptical of the mutual fund industry. In the past five years, more than two-thirds of the 5,000-plus funds followed by Morningstar have done worse than the underlying stock and bond indexes they're supposed to beat, or at least track. That sorry performance has left millions of people fuming and frustrated -- to the point where investors have yanked $340 billion out of stock funds since January 2008.

Related Video
  • Finding the Right Mutual Funds

But that broad-brush assessment may miss one obvious but crucial fact: Some funds are still shining. Over the past year, for example, the managers at Wells Fargo Advantage Growth Investor fund have returned nearly 13 percent, thanks to some timely big bets on Apple and Whole Foods. Funds specializing in gold, commodities or other alternative investments also have had awfully good runs. During the past five years, in fact, dozens of funds have apparently made some rather intuitive market moves that have put their shareholders in the black. The challenge for investors, of course, is to find the managers who are most likely to do the same going forward -- a challenge that led us to our annual best-funds list, divided into four categories.

Also See
  • The Two Faces of Janus

U.S. Stock Funds

Fidelity OTC Portfolio (FOCPX)

  • Manager: Gavin Baker
  • Assets: $7.1 billion
  • Top Holdings: Apple, Google

This fund has plenty of big names, and it measures itself against the broad Nasdaq. It has been helped by owning Apple, but the decision to buy that tech giant was made before the current manager, Gavin Baker, took over in summer 2009. That makes some analysts question whether the fund's future will be as good as its past. The fund is up about 17 percent since Baker took the reins. Fidelity says the record speaks for itself. For his part, Baker says firms that capitalize on the shift toward centralized "cloud" computing will prevail in the current decade. Nearly half the fund's assets are in 10 names, including Qualcomm, Oracle and, yes, Apple. "That can cut both ways," says Jim Lowell, editor of the Fidelity Investor newsletter, but so far it's worked.

Reynolds Blue Chip Growth (RBCGX)

  • Manager: Frederick Reynolds
  • Assets: $207 million
  • Top holdings: Apple, Baidu

SmartMoney asked Morningstar for a list of the top-performing funds over the past five years from four separate categories: U.S. Stocks, Foreign Stocks, Bonds and Alternatives. From there, we whittled down the list, eliminating funds that charge high annual expenses and have high minimum investments. We also wanted to highlight funds that any investor can get into, so we took out funds that are only available in retirement plans or are closed to new investors.

Frederick Reynolds runs his investment shop from his house a few blocks from the Las Vegas Strip. Back in late 2007, he sold stocks in earnest after worrying about consumers borrowing against their homes to finance their lifestyles. As a result, Blue Chip Growth lost only 5 percent in 2008, compared with the broader market's 39 percent slide. Today, however, Reynolds is bullish. He recently bought a home in Las Vegas, now America's foreclosure capital, because he says some real estate there is a good value. Stockwise, he prefers firms whose dominant market positions make it tough for competitors to gain ground, such as online retailer Amazon and Chinese Internet-search firm Baidu. Reynolds came to prominence with a string of big years at two other funds in the 1990s. But in the wake of huge losses during the dot-com bust, he shuttered two: Reynolds fund and Reynolds Opportunity fund.

Yacktman (YACKX)

  • Manager: Donald Yacktman
  • Assets: $6.3 Billion
  • Top Holdings: PepsiCo, News Corp.

Austin, Texas, resident Donald Yacktman actually runs two top-performing funds. At first glance, the stocks Yacktman likes seem to have nothing in common. But Jason Subotky, who runs the fund with Yacktman p re and his son Stephen, says there's a pattern: Most holdings are global firms with multiple business lines that generate predictable revenue. The Yacktman fund owns PepsiCo -- about a tenth of its portfolio -- not for its soft drinks but for its snack-chip brands, which include Lay's and Doritos. Yacktman also favors News Corp. -- another 10 percent of the fund -- for its cable channels' share of stable subscription fees (News Corp. owns SmartMoney). In addition to stellar five-year returns, this fund also has beat the market over 10- and 15-year spans.

Intrepid Small Cap (ICMAX)

  • Manager: Jayme Wiggins
  • Assets: $684 million
  • Top holdings: Bio-Rad Laboratories, CSG Systems International

This fund aims to own firms that have clear, simple business models, predictable cash flows and manageable debt loads. "We want to be able to predict what's normal for a company to earn," says lead portfolio manager Jayme Wiggins, whose portfolio includes billing software company CSG Systems International and medical instrument maker Bio-Rad Laboratories. Wiggins took over the fund's portfolio in 2010 after graduating from Columbia Business School (he ran Intrepid's high yield bond portfolios before grad school). Like his successful predecessor, Eric Cinnamond, Wiggins isn't afraid park money in cash if there's a dearth of undervalued securities. That's precisely what he did last year, putting roughly a fourth of the fund in cash. The tactic has helped of late, but "it's not always going to look good in every market," says Morningstar mutual fund analyst Katie Reichart.

T. Rowe Price Health Sciences (PRHSX)

  • Manager: Kris Jenner
  • Assets: $3.1 Billion
  • Top holding: Alexion Pharmaceuticals

Portfolio manager Kris Jenner's fund has an assortment of mid-sized and large healthcare firms, but he's willing to take some chances on smaller companies whose drugs have lots of potential, such as Incyte Corp. and Pharmasset Inc. But sharp market swings can make trying to pick the right small company a dangerous game. "They have a lot of boom and bust periods. Making it up after a bust is hard," says Jenner, who landed at T. Rowe Price as an associate biotech analyst in 1997 after a career as a physician. To smooth out big swings, the fund mixes the volatile stocks with more-established ones, typically firms that Jenner says enjoy consistent earnings growth. Among his current favorites: McKesson, the drug and medical supply distributor, and insurance company UnitedHealth Group.

Name Ticker 1-Year Return (%) 5-Year Average Annual Return (%) Expenses per $10,000
Alger Spectra SPECX 3.96.5126
American Century Heritage Investor TWHIX -2.36.7101
Berkshire Focus BFOCX -2.68.6200
Fidelity OTC Portfolio FOCPX 7.16.392
Fidelity Select Consumer Staples Portfolio FDFAX 9.67.586
Fidelity Select Retailing Portfolio FSRPX 7.97.093
Fidelity Small Cap Discovery FSCRX 5.36.5104
Hancock Horizon Burkenroad HHBUX 8.45.6140
Icon Energy ICENX 3.24.4124
ING Large Cap Growth Portfolio IEOSX 5.86.285
ING Midcap Opportunities Portfolio ISMOX 3.97.6104
Integrity Viking Williston Basin/Mid-North America Stock ICPAX 14.98.2150
Intrepid Small Cap Investor ICMAX 5.112.6140
Janus Triton JANIX 8.07.882
Munder Growth Opportunities MNNAX -0.95.8199
Pin Oak Equity POGSX 5.05.4125
Reynolds Blue Chip Growth RBCGX -1.411.8180
Saratoga Technology & Communication Portfolio STPAX -3.29.8267
SouthernSun Small Cap Investor SSSFX 15.87.8143
T. Rowe Price Health Sciences PRHSX 16.47.884
T. Rowe Price Media & Telecommunications PRMTX 3.37.484
Tilson Dividend TILDX 1.56.1195
Transamerica Systematic Small/Mid Cap Value IIVAX 3.85.5147
Wells Fargo Advantage Growth Inestor SGROX 13.49.2131
Yacktman YACKX 8.48.085
Foreign Stock Funds

Westcore International Small-Cap (WTIFX)

  • Managers: Jeremy Duhon and John Fenley
  • Assets: $134 million
  • Top holdings: IG Group, Credit Corp Group

Westcore managers John Fenley and Jeremy Duhon like to point out that with 10,000 small-company stocks around the world to choose from, they've picked just 36. The best of these small fries tend to be "fast-growing companies that can endure a weak environment," says Fenley. Among the current favorites: German electronic-payments processor Wirecard, which has managed to increase its profits despite the gloomy mood among European consumers, and IG Group Holdings, a British financial-trading firm. These days, nearly half the fund is invested in industrial firms, says Todd Rosenbluth, a mutual fund analyst at Standard & Poor's Capital IQ. "That's a pretty heavy bet."

Calamos International Growth (CIGRX)

  • Managers: John P. Calamos and Nick Calamos
  • Assets: $556 million
  • Top holdings: Novo Nordisk, ARM Holdings

John P. Calamos, a son of Greek immigrants, cut his teeth investing in convertible bonds. But he and his nephew Nick have, for a decade, shown a knack for finding small-but-growing stocks -- and for knowing what to stay away from. One move that helped International Growth recently was the decision to avoid bank stocks, for example. "There's no way to get a handle on risks they're taking," explains Nick Calamos. He also worries that consumers in the U.S. and Europe are "tapped out" after years of overspending. So far, such instincts have paid off: Over the past five years, the fund has returned 28 percent.

Saturna Sextant International (SSIFX)

  • Manager: Nick Kaiser
  • Assets: $162 million
  • Top holdings: Copa Holdings, Teck Resources

Nick Kaiser is charged with finding bargains all over the world, but investors could be forgiven for thinking of the manager as something of a homebody. While the average large-blend foreign fund has about 8 percent of its stocks in the Americas, Kaiser, who has run Saturna Sextant International since 1995, invests more than 40 percent of his fund's money here. Among the fund's largest bets: Toronto-Dominion Bank, Potash Corporation of Saskatchewan and miner Teck Resources, whose Vancouver, British Columbia, headquarters are about an hour's drive from Bellingham, Wash., where Kaiser was born and now works. What's to like about the great icy north? Kaiser praises Canada's relatively clean and stable politics, which he says makes it easier for him to assess and judge the country's companies. Says the 65-year-old fund manager: "We have a conservative outlook." Kaiser also manages the Amana funds, which invest in accordance with Islamic law.

Thornburg Global Opportunities (THOAX)

  • Assets: $308 million
  • Top holdings: Google, Microsoft

Co-manager Vinson Walden eschews big macro-economic calls, focusing instead on finding growing businesses that, for one reason or another, trade at cheap prices. "We kiss a lot of frogs," he says, although they end up buying only a relatively few. The, portfolio of between 30-40 stocks had a tradition of trouncing rivals until the financial crisis, but it was crushed in 2008 down 48 percent. It's bounced back well, even with a brutal 2008, its performance puts it in the top 7 percent of all foreign stock funds over the past five years. These days, Walden sees opportunity in Brazil, where he thinks investors who've sent Brazilian stocks tumbling over the past year this year are overreacting to inflation worries. His picks: Brasil Foods and homebuilder Cyrela Brazil Realty.

Wasatch World Innovators (WAGTX)

  • Assets: $86 million
  • Top holdings: Apple, Mastercard, Visa

This fund holds its share of tech giants like Apple, Google and Intel. But ultimately, says Wasatch chairman Sam Stewart, he's just looking for "companies that are doing things in a new and better way." Stewart, a former academic, is no stranger to questioning authority. He founded the Utah-based company in 1975 after listening to famed finance professor Eugene Fama deliver a lecture suggesting investors couldn't beat the market. About a third of the fund's stocks are outside the technology and healthcare sectors. Among them: World Fuel Services, a company that's carved out a business as a middleman between oil companies and large oil consumers such as airlines and InnerWorkings, which handles printing needs of businesses. "It's not just innovative products, it's innovative business models," says Stewart.

Name Ticker 1-Year Return (%) 5-Year Average Annual Return (%) Expenses per $10,000
Aberdeen China Opportunities GOPAX -12.28.4188
Aberdeen Emerging Markets GEGAX -6.45.8179
Alger China U.S. Growth CHUSX -13.42.2212
Calamos International Growth CIGRX 3.84.0167
Encompass ENCPX -21.32.6145
Fidelity Advisor Emerging Asia FEAAX -10.38.2140
Fidelity Canada FICDX -6.73.189
First Eagle Overseas SGOVX 1.33.8117
Henderson European Focus HFEAX -13.21.1154
ING Morgan Stanley Global Franchise Portfolio IVGTX 11.85.0123
Janus Global Research JANGX -2.32.8100
John Hancock Global Opportunities JGPAX -26.33.5149
Matthews Asia Growth Investor MPACX -8.83.8119
Matthews China Investor MCHFX -18.311.1115
Oakmark Global Select OAKWX -1.22.3124
Old Westbury Global Small & Mid Cap OWSMX -2.34.8111
Oppenheimer Developing Markets ODMAX -10.57.3130
Oppenheimer International Small Company OSMAX -12.11.2122
Saturna Sextant International SSIFX -4.82.3103
T. Rowe Price New Asia PRASX -7.48.696
Thornburg Global Opportunities THOAX -0.12.6148
Virtus Global Infrastructure PGUAX 10.63.1133
Wasatch World Innovators WAGTX 10.13.2196
Wells Fargo Advantage Emerging Markets Equity EMGAX -6.76.9189
Westcore International Small-Cap WTIFX 2.62.8150
Taxable Bond Funds

Dreyfus International Bond (DIBAX)

  • Manager: Dave Leduc
  • Assets: $1.3 billion
  • Top holdings: Government debt of sweden and Japan

Bets on the debt of U.S. blue chips such as Coca-Cola and IBM as well as savvy currency hedges have helped this fund leapfrog past peers since the financial crisis. Last year comanager Dave Leduc began trimming higher-yield holdings, including Spanish and Italian debt, when their gyrating prices signaled danger. He's now bullish on emerging markets like Mexico and U.S. corporate stocks outside the financial sector. For those who prefer less exposure to the euro and yen, Los Altos, Calif., adviser Don Martin suggests a sister fund, Dreyfus Emerging Markets Debt Local Currency (DDBAX).

Templeton Global Bond (TPINX)

  • Manager: Michael Hasenstab
  • Assets: $56.7 billion
  • Top holdings: Korea national debt (various coupons)

This fund has been trading foreign debt for more than 25 years. It lost almost 9 percent when markets swooned late last summer, but it has beaten its benchmark bond index by, on average, more than five percentage points a year for the past 10 years. Kimberly Adams, chief financial officer of the financial-planning firm ProVise Management Group, says she has put some of her clients' money in the fund because while it's more volatile than most of what she owns, it tends to come out on top. Manager Michael Hasenstab, whom Morningstar named bond manager of the year in 2010, acknowledges the challenges of investing in a global market that's ever in flux: "There are developed countries that are becoming emerging ones and emerging countries that are becoming developed," he says. To help cut the risk, the 38-year-old manager seeks out emerging markets with both strong growth prospects and low levels of debt. Two favorites: Korea and Indonesia.

Metropolitan West Total Return Bond (MWTRX)

  • Manager: Tad Rivelle
  • Assets: $17.5 billion
  • Top Holdings: U.S. Treasurys, Fannie Mae-backed mortgages

This $17 billion go-anywhere bond fund, run by a group of Pimco alumni, has roughly matched returns of the far larger and better-known Pimco Total Return over the past decade. In general, the MetWest fund displays a conservative bent, says Lipper analyst Jeff Tjornehoj. Tad Rivelle, one of the fund's three comanagers, says the MetWest fund "skinnied down" on corporate bonds after spotting a credit glut in 2007, then bought them back when these bonds' prices plunged a year later, during the financial crisis. About 40 percent of the fund is mortgage-backed securities, but Rivelle is also bullish on the debt of big U.S. financial companies, including Goldman Sachs and JPMorgan Chase, which he sees as discounted because of the problems assaulting their European counterparts. "There's a certain amount of overreaction," he says.

AllianceBernstein High Income (AGDAX)

  • Assets: $3.3 billion
  • Top Holdings: AllianceBernstein Fixed-Income Shares, Republic of Venezuela 7.65%

This fund aims to find attractive yields, wherever they might be lurking. That means they tend to own debt that is "the low-rated of the low-rated" says Lipper analyst Jeff Tjornehoj, but "they've managed to find undervalued securities at the right time." After losing nearly a fourth of its value in 2008, the fund posted 62 percent gain in 2009, rocketing past peers. The fund had made a big bet on emerging market bonds but has cut back after a recent rally. Co-manager Gershon Distenfeld says he sees better value in U.S. high-yield "junk" bonds and the debt of U.S. financial firms, which trade at depressed prices. While the market remains wary of these high-yield companies, many have been cutting debt. The fundamentals are in good shape," he says.

Lord Abbett Income Fund (LAGVX)

  • Asset: $1.3 billion
  • Top Holding: Freddie Mac debt, Altria Group bond with 9.95% coupon, Time Warner Cable

This fund specializes in bonds rated "BBB," debt hovering just above investment grade. That stance has helped boost the fund's yield but poses risks in a down market, says S&P Capital IQ analyst Dylan Cathers. Lord Abbet's managers emphasize there is a big difference between their fund and alternatives that target junk bonds. "There's something special about that demarcation line," says co-manager Robert Lee. One area where managers see value right now: bonds of energy companies such as Canadian Oil Sands. While their profits can reflect swings in energy prices, the energy producers have enough reserves to pay the bonds.

Name Ticker 1-Year Return (%) 5-Year Average Annual Return (%) Expenses per $10,000
AllianceBernstein High Income AGDAX 1.88.795
CM Advisors Fixed Income CMFIX 5.06.390
Delaware Corporate Bond DGCAX 5.17.295
Delaware Diversified Income DPDFX 4.97.793
Dreyfus International Bond DIBAX 4.39.1109
Fidelity Capital & Income FAGIX -0.86.976
ING Pioneer High Yield Portfolio IPHSX 0.27.696
Janus Flexible Bond JANFX 4.97.359
Loomis Sayles Core Plus Bond NEFRX 6.07.690
Loomis Sayles Investment Grade Bond LIGRX 4.57.081
Lord Abbett Income LAGVX 5.07.490
Metropolitan West Total Return Bond MWTRX 3.97.463
PIMCO Foreign Bond PFBDX 9.28.090
PIMCO Investment Grade Corporate Bond PBDAX 5.08.090
Putnam American Government Income PAGVX 4.67.585
Putnam U.S. Government Income PGSIX 4.17.584
T. Rowe Price U.S. Treasury Intermediate PRTIX 7.57.451
Target Intermediate-Term bond TAIBX 4.07.466
Target Total Return Bond TATBX 4.77.767
TCW Core Fixed-Income TGFNX 5.48.078
TCW Emerging Markets Income TGINX 3.010.1125
TCW Total Return Bond TGMNX 3.37.874
Templeton Global Bond TPINX -0.29.288
Thompson Plumb Bond THOPX 2.47.380
Vanguard Intermediate-Term Treasury Investor VFITX 7.27.222
Alternative Funds

Permanent Portfolio (PRPFX)

  • Manager: Michael Cuggino
  • Assets: $15.4 billion
  • Top holdings: U.S. Treasurys, gold

The fund, which keeps two-thirds of its portfolio in gold, Treasurys and Swiss francs, is designed to preserve investors' nest eggs rather than post big returns. But recently, it has been able to do both. While the heavy reliance on such assets concerns some financial planners (Douglas Kreps, principal at Fort Pitt Capital Group, says that strategy essentially bets on a "doomsday scenario"), manager Michael Cuggino says the remaining third of the fund, which includes real estate and energy stocks, should thrive in bull markets: "Each of the assets will be volatile, but by combining them, you smooth your returns."

Merk Hard Currency (MERKX)

  • Manager: Axel Merk
  • Assets: $563 million
  • Top Holdings: Sweden's government debt, SPDR Gold Trust ETF

"The Fed will never say this, but they want inflation," says the Munich-born, California-based Axel Merk, who has bet on the dollar's decline over several years. The 42-year-old manager favors hard assets such as gold and currencies such as the New Zealand and Australian dollars, which he believes will benefit from higher commodity prices. Analysts say a number of low-cost exchange-traded funds can just as easily help investors bet against the dollar, which raises questions about whether the fund can continue to justify its 1.3 percent annual fee. "It's a really straightforward strategy that's well-suited to indexing," says Dave Nadig, director of research for Merk says the investors he serves want professional advice and will pay for it.

FPA Crescent (FPACX)

  • Manager: Steve Romick
  • Assets: $7.5 billion
  • Top Holdings: Aon, CVS Caremark

This fund's manager, Steve Romick, holds quarterly conference calls for investors, much like a public-company CEO discussing quarterly profits. Romick often has a lot of explaining to do, since he has the leeway to stuff his fund with whatever he thinks will work. He then sticks with the picks: The fund's turnover is 20 percent, nowhere near the 55 percent average for alternative funds. These days, about two-thirds of the fund is invested in stocks, especially in those of large multinational corporations that Romick says will benefit from emerging markets' growth. "He doesn't hit a lot of home runs with stocks. He hits a lot of singles and doubles," says Ron Roge, a financial planner who invests in FPA Crescent for his clients. Among Romick's recent nonstock bets: loaning money to an office building, buying farmland and picking up pools of subprime residential mortgages.

Hundredfold Select Alternative Fund (SFHYX)

  • Assets: $65 million
  • Top holdings: Pimco High Yield Institutional, SEI Institutional High Yield Bond, Nuveen High Yield Muni Bond

Early in his career Ralph Doudera struggled to reconcile investing's underlying goal - making big bucks - with his Evangelical Christian faith. At one point he bought a Porsche, then sold it after a change of heart and gave the proceeds away. Today, he makes his living managing money for individual clients but donates Hundredfold Select's management fee to a non-profit he set up. While the fund is designed to be, in Doudera's words, "a slow and steady plodder" it does so using a complex investment strategy involves using a mix of mutual funds, ETFs and derivatives. Doudera's take on bond yields, along with avoiding some stocks, helped the fund adroitly maneuver the 2008 credit crisis.

James Balanced: Golden Rainbow (GLRBX)

  • Assets: $1.3 billion
  • Top Holdings, US Treasury notes

While this fund is designed to own a broad mix of stocks and bonds, it owes its recent success to it conservative bent. S&P Capital IQ mutual fund analyst Todd Rosenbluth calls Golden Rainbow's 2008 decline of just 5 percent "outstanding" for a fund of its type, although he notes it did lag the following year when markets took off. Today, the fund is staying conservative thanks to the nation's 8.5 percent unemployment rate and trouble in Europe. Co-manager Brian Shepardson thinks Treasurys still have room to appreciate, though not to the same extent that they did in 2011. At the same time, Shepherdsonsays the fund has been cutting its stock exposure and focusing on domestic-oriented companies like retailer DollarTree and utility Portland General Electric firms he says are unlikely to be hurt by trouble in Europe.

Name Ticker 1-YearReturn (%) 5-Year Average Annual Return (%) Expenses per $10,000
API Efficient Frontier Income APIUX -4.07.0171
Columbia Balanced CBALX 3.54.478
FBR Balanced Investor AFSAX 10.64.4124
FPA Crescent FPACX 6.34.6113
Hundredfold Select Alternative Service SFHYX 5.16.1255
Hussman Strategic Total Return HSTRX 4.87.164
Intrepid Capital Investor ICMBX 5.06.7145
Ivy Balanced IBNAX 5.04.4130
James Balanced: Golden Rainbow GLRBX 4.85.3112
Janus Balanced JANBX 2.44.872
Janus Moderate Allocation JNSMX -0.33.925
John Hancock Balanced SVBAX -0.14.2117
Legg Mason Western Asset Managed Municipals SHMMX 7.75.264
Marshall Intermediate Tax-Free Investor MITFX 5.75.455
Merk Hard Curency Investor MERKX 5.05.5130
MFS Lifetime Retirement Income MLLAX 4.25.428
Permanent Portfolio PRPFX 8.18.777
State Farm Municipal Bond SFBDX 9.65.915
State Farm Tax-Advantaged Bond A Legacy SFTAX 9.25.668
USAA Precious Metals and Minerals USAGX -3.615.0115
Van Eck International Investors Gold INIVX -7.414.7125
Vanguard Wellesley Income Investor VWINX 8.35.625
Waddell & Reed Asset Strategy UNASX -2.77.0114
Waddell & Reed Continental Income UNCIX 5.44.5121
Waddell & Reed Municipal Bond UNMBX 6.35.087