Tom Marsico Is Pound-the-Table Bullish

An economic recovery is already under way in the U.S., and we're in the early stages of a new bull market for stocks, says veteran fund manager Tom Marsico. We met up with Marsico, who runs Marsico Focus (symbol MFOCX) and Marsico Growth (MGRIX), in Chicago at the annual Morningstar Investment Conference. He gave us his take on the big picture and his top stock picks.

Marsico, who honed his skills at Janus, takes a hands-on approach to investment research. Sure, he looks at company earnings, gross-domestic-product figures and the latest numbers on consumer sentiment. But he'll also stop at a hotel's reception desk to ask how business is going, gather data from a friend in London on the size of the lines at McDonald's restaurants, and send analysts to China to analyze the government's stimulus plan. No data point is too big or too small for Marsico. And today all the data are feeding into a distinctly sunny outlook.

"This is one of the greatest investment opportunities of my career," he says. Stocks are the cheapest he's seen since the early 1980s, and the $4 trillion sitting on the sidelines in money-market funds could provide some dry powder to spark further advances in share prices.

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Marsico doesn't think that U.S. interest rates will move much higher, or that we're in for a bear market in Treasuries. Some would say that we're already in a bear market for government bonds. The yield on the benchmark ten-year Treasury note has jumped -- from 2.04% on December 18 to 3.70% on May 27 -- because of rising fears about inflation and concerns about Uncle Sam's need to sell vast amounts of new bonds to finance an ever-widening budget deficit.

Stocks in Marsico's funds typically fall into one of three categories. Core growth companies, such as top holdings McDonald's (MCD) and Wal-Mart Stores (WMT), are the types of businesses for which he can project, with reasonable certainty, what profits will look like in six months or three years. Then there are more-aggressive, faster-growing companies, such as Genentech, the biotech company that was just acquired by Swiss drug giant Roche Holding. Finally, there are what Marsico calls "life-cycle companies," which are benefiting from a fundamental change in the broader economy or in regulations, or from an internal restructuring.

He thinks both regulatory and economic shifts make for a fecund environment for certain financial stocks. With the boom in securitization, he notes, lending has become dominated by entities that aren't banks. "The percent of lending done by banks in the mid 1970s was 65%. Now it's down to 25%."

But he sees a regulatory backlash brewing, and he thinks banks that focus on taking deposits and making loans stand to benefit. He favors U.S. Bancorp (USB) and Wells Fargo (WFC). "U.S. Bancorp came out best in class in the stress tests. We think they'll repay TARP money, and over the next 18 to 24 months the stock has the potential to double," he says. The stock closed at $17.96 on May 27. An added benefit of de-leveraging in the financial sector, Marsico says, is that investors will reward companies with higher price-earnings ratios once profits become more reliable.

Marsico is especially enthusiastic about McDonald's, which he says stands to make a killing on its plan to broaden its beverage offerings. In addition to its new McCafe coffee-shop concept, the company is adding bottled waters, smoothies, natural drinks and more to existing locations. "The profit margins on those products are 80%," Marsico says, and the company thinks this will boost annual revenues per store by 13% to 25%. Not to mention that "it's selling some stores to franchisees and using the money to increase its share-repurchase program and dividend." At $57.82, the stock yields 3.5%