Even a dart-throwing monkey could have made good money in the stock market since it bottomed in March 2009. Nearly everything shot up, including some pretty junky fare. Expect investors to become more discriminating. That implies a rotation to higher-quality companies with sound business models and sustainable growth prospects. The early stage of the surge in profits owed much to aggressive cost-cutting. Now investors will search for businesses that can boost sales as well as earnings. (Share prices are as of the May 10 close.)
Capital spending, particularly on technology, is rebounding around the globe. Applied Materials (symbol AMAT, $13), the world's leading maker of semiconductor-manufacturing equipment, is poised to benefit. Applied, which also supplies equipment for making LCD and solar panels, stays ahead by plowing nearly $1 billion a year into research and development. More than 80% of revenues come from abroad.
Oil stocks have lagged the jump in oil prices over the past year. Marathon Oil (MRO, $32), which trades at just six times 2011 projected earnings and yields 3.0%, is one that seems too cheap. Ed Maran, co-manager of Thornburg Value Fund, says that Marathon owns attractive producing assets as well as refineries that are geographically well situated. He thinks Marathon would make an alluring buyout target for a big energy firm.
Banks are still recovering from their largely self-inflicted wounds. But there's always a need for banking, and some of the survivors will flourish. One of these will be US Bancorp (USB, $27), of Minneapolis. US Bancorp, a conservative lender, remained profitable every quarter through the financial collapse. Its big fee-based businesses, such as credit-card and merchant processing, help shield it from volatility in the economy.
Now that health-care reform is law, it's time to look for values in the health-stock sector. One strategy is to find companies with an ability to boost volumes and prices. Jerry Jordan, of Jordan Opportunity Fund, thinks he's found one such firm in Laboratory Corp. of America (LH, $77). LabCorp and Quest Diagnostics are the dominant independent-clinic labs, which test for everything from substance abuse to genetic makeup.
There are worse ways to pick stocks than to identify companies with business models that tend to insulate them from competition over the long haul. Maran is keen on Thermo Fisher Scientific (TMO, $54), the top distributor of lab equipment and other supplies to biotech firms, one of the healthier parts of the drug sector. And Maran says that Thermo is in a powerful position, with a wide array of products and a huge sales force.
We'll leave you with one foreign stock, Unilever (UN, $29), the Anglo-Dutch packaged-goods giant best known for such brands as Lipton, Ben & Jerry's and Dove soap. Unilever has several things going for it. It generates half of its sales in vibrant emerging markets, such as India and Indonesia, and it has become more focused under a new chief executive. Plus, it should benefit from a weak euro, and its stock yields an appealing 3.8%.