How to Profit in This Tricky Economic Environment

A bargain hunter, a hedge-fund manager and a brokerage strategist share their market outlooks and their game plans.

Bill Miller

Co-manager of Legg Mason Value Trust and Legg Mason Opportunity Trust

The stock market is not just a leading indicator of the economy; it has a direct impact on the economy's health. As long as the market keeps climbing, you can be reasonably confident that economic growth will accelerate. And if the Fed provides an enormous amount of stimulus, that will cause the stock market to rise, and that will lead to better economic growth. I would not be surprised to see the stock market move up 20% in the next 12 months. Corporate profitability is high, balance sheets are strong, stock prices are cheap, dividends are going up, and inflation is low. Stocks are the cheapest they've been versus bonds in the past 50 years. This is a once-in-a-lifetime opportunity to buy the highest-quality mega-size U.S. companies at prices you're unlikely to see again. We like financial, technology and health-care stocks. Specifically, Wells Fargo (symbol WFC (opens in new tab)), Goldman Sachs (GS (opens in new tab)), Bank of America (BAC (opens in new tab)), Aflac (AFL (opens in new tab)), Texas Instruments (TXN (opens in new tab)), Cisco Systems (CSCO (opens in new tab)), Intel (INTC (opens in new tab)) and Hewlett-Packard (HPQ (opens in new tab)).

Michael Lewitt

Co-founder of Harch Capital Management, an investment advisory firm

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More stimulus by the Fed will not create jobs or economic growth. However, I'm not anticipating a double-dip recession. I expect some growth. But I don't think the Fed is following the correct policies. It should raise interest rates at the earliest possible time because its policy is perpetuating a boom-and-bust cycle and punishing savers. Until the government changes spending and tax policies to direct spending toward productive areas, corporations won't have a reason to spend money in ways that create growth.

Because the economy is so bad, I don't know how you can make the case for stocks going much higher in the coming year. The best strategy is to buy dividend-paying stocks with low price-earnings ratios. Investors should continue to hold some of their assets in gold -- preferably the physical metal. But an exchange-traded fund such as SPDR Gold Shares (GLD (opens in new tab)) is a decent alternative. Also, invest in bank-loan funds and corporate debt rated triple-B [the lowest investment-grade rating] and double-B [the highest junk rating].

Bob Doll

Chief stock strategist at BlackRock; manager of BlackRock Large Cap Growth Fund

The economy over the next year will look much like it did the past year. We'll muddle through, and the stock market will grind higher. We're still paying down debt. That puts a burden on individuals' ability to spend money. But low interest rates, stimulus from the Fed, and cash-rich companies using some of their money for expansion will buoy growth. Hiring will increase in 2011, but it won't be enough to put a big dent in the unemployment rate. Investors should buy companies that generate free cash flow. You should also have exposure to companies that will benefit from the global recovery. So we suggest stocks of specialty retailers, media companies, technology, industrials and energy. Within those sectors we like The Limited (LTD (opens in new tab)), Comcast (CMCSA (opens in new tab)), International Business Machines (IBM (opens in new tab)) and Marathon Oil (MRO (opens in new tab)). Part of your portfolio should be in areas that can grow independently of the economy. So we like health-care-services companies, such as UnitedHealth (UNH (opens in new tab)), and selected telecommunications names, such as Verizon (VZ (opens in new tab)).

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Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance