5 Stocks to Navigate Stormy Seas

Much of Western Europe is sinking deeper into recession. Falling demand from Europe is pinching emerging markets, particularly China. And the U.S. economy is growing only sluggishly.

What's an investor to do? Kevin Grant, co-manager of Oakmark Fund (symbol OAKMX), says he and his partner, Bill Nygren, are finding plenty of high-quality companies trading at bargain prices. Below are five of their favorites (all share prices and related data are as of the October 4 close):

American International Group (AIG) made the catastrophic blunder of insuring billions upon billions of dollars in toxic mortgage-backed securities. The government bailed out AIG in 2008 to the tune of $180 billion.

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But Grant says the company has re-invented itself. Under new management, it has repaid Uncle Sam all but $10 billion. It has disposed of or hedged almost all of its risky derivatives. And it has sold off several major businesses; it now owns only two: Chartist, a property and casualty insurer, and SunAmerica, a life insurance firm. Yet the new AIG, at $34.95, trades at just 0.5 times book value (assets minus liabilities), and Grant thinks book value will grow at a healthy clip.

Apple (AAPL) has surged 65.3% this year alone, to $666.80. But the stock still trades at just 11 times estimated analysts' earnings for the coming 12 months. Plus, it has more than $100 billion in cash on its balance sheet. Grant thinks the Apple juggernaut will continue even without Steve Jobs. "We've seen earnings grow as fast as the share price," he says.

And Grant sees plenty of room for future growth. Apple's share of the global market for smart phones is a modest 20%. The iPad's share of the global market for tablet computers is higher, but the overall market penetration for tablets is still low. Apple's personal computers are also growing rapidly in popularity.

Investors have penalized Bank of America (BAC), one of several major bank stocks Oakmark owns, because they fear a future financial meltdown and because it's nearly impossible to decipher any big bank's financial reports. Grant thinks that even though B of A's stock price has climbed 69.8% this year, to $9.41, the shares are still too cheap. Like AIG, B of A trades at about 0.5 times book value. Grant says the company should produce annual earnings of about $2 a share annually in a few years.

Home Depot (HD) has already seen its stock price surpass its highs from before the housing crash. But Grant thinks the shares will continue to rise, even though they trade at a fairly rich 18 times estimated earnings for the coming 12 months. New-home starts are still only at about half of normal levels, Grant says, suggesting that the housing recovery still has a ways to go. As that happens, Home Depot will pick up steam. Plus, CEO Francis Blake has taken bold steps toward making Home Depot more efficient and improving the customer experience.

Many investors have written off Intel (INTC) as "old tech." The king of microprocessors for personal computers, they say, is a relic in an era when more and more consumers are doing their computing on smart phones and tablets.

But Grant argues that Intel has a few more tricks up its sleeve. PCs, for one, are increasingly popular among the growing middle classes in emerging markets. Intel also dominates in servers, which power the Internet. More important, Grant says, Intel's massive research-and-development spending will enable it to successfully compete with industry leader ARM Holdings (ARMH) in low-power microprocessors for smart phones. And Intel is helping computer makers roll out new "ultrabooks" -- hybrids between tablets and notebooks that, natch, will use Intel chips. At $22.47, the stock trades at just 10 times estimated earnings for the coming 12 months.

Not a stock picker? Oakmark Fund boasts a fine long-term record. Over the past 15 years, the fund returned an annualized 5.6%, beating Standard & Poor's 500-stock index by an average of almost one percentage point per year. During the past five years, the fund returned an annualized 4.2%, topping the S&P 500 by an average of 3.1 points annually.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area. He and several of his clients own shares of Apple.

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