Charles Severson // Portfolio Manager // Baird MidCap (BMDSX)

Comments & Outlook

The weakening global economy continues to pressure earnings multiples. Although China is now pursuing monetary easing, its economic data are still deteriorating. Meanwhile, Europe has yet to arrive at a credible solution for its sovereigndebt crisis.

Analysts initially had rosier expectations for the second half of 2012, but profit growth has slowed, and many companies have lowered their earnings guidance. Because of these headwinds, we’re focusing on less cyclical businesses that generate most of their revenue in the US.

Recommended Strategies

We look for companies whose earnings and revenue growth rates outpace their peers over the long term. In particular, we favor companies whose business models generate enough cash internally to finance their growth.

Our risk-mitigation efforts emphasize position size and sector weight. Position sizes should be adjusted based on a company’s operating environment, as well as the market as a whole. There are periods when even great companies aren’t going to be great stocks. We avoid making big sector bets, though given a stronger economic environment we’ll invest more heavily in top-performing sectors.

What to Buy Now

Stericycle (NSDQ: SRCL) is the world’s largest medical-waste business. The company collects medical waste from hospitals and doctors’ offices, and then decontaminates it with heat or chemicals, before pulverizing and disposing of it.

Management has made superb acquisitions, which have enabled the company to expand its operations to Europe and South America. Over the next two years, they’ll likely move into Asia, with a particular focus on Japan, which is the world’s second-largest medical market. We expect Stericycle to sustain a midteens earnings growth rate for the foreseeable future.

Illumina (NSDQ: ILMN) is the leading producer of high-speed gene sequencers. As gene sequencing becomes more cost-efficient, Illumina’s products will eventually enable doctors to tailor treatments to individuals, which will be a major aspect of therapeutic care in the future.

The company is at the outset of a new product cycle, which typically leads to a reacceleration of earnings growth. Over the long term, we forecast Illumina’s earnings to grow in the mid-teens.

Brian McMahon // Co-Portfolio Manager // Thornburg Investment Income Builder (TIBAX)

Comments & Outlook

The equity market right now presents more of an opportunity than a minefield, despite (or maybe due to) the murky near-term economic outlook. The US economy is struggling to recover—and it eventually will—but we might not see evidence of this in the next six months due to electoral politics and the uncertainty surrounding the European sovereign-debt crisis.

Fortunately, US public company balance sheets are largely in decent shape, so they should have the financial strength to weather the storm. By contrast, overseas firms tend to carry more leverage on their balance sheets, and their stocks trade well below their typical valuations.

Recommended Strategies

Given continued economic uncertainty but solid corporate balance sheets, we are focusing on large, income-paying equities. Our biggest sector allocation: the global telecoms.

What to Buy Now

AT&T (NYSE: T) has done well lately, and we still don’t think its stock is overpriced. But we prefer Vodafone Group (NSDQ: VOD) because its shares haven’t appreciated as much, as well as the fact that they offer a higher yield (recently about 7 percent). We also expect greater dividend growth going forward. Additionally, Vodafone owns 45 percent of Verizon Wireless, although the market often overlooks the growth potential from this substantial stake. Beyond that, Vodafone has 400 million mobile telecom customers of its own.

JPMorgan Chase & Co (NYSE: JPM) has dealt with a lot of controversy lately, such as trading losses that may top $7 billion, so there’s a malaise hanging over it. Nevertheless, JPMorgan’s relative position in retail banking, investment banking and asset management is strong and even improving. The banking giant pays out $1.20 per share in dividends annually (yielding 3.3 percent recently), and it has already earned that amount in the first half of 2012. This year’s earnings are expected to come in at $4.60 per share and should rise to $5.00 per share next year. I don’t think JPMorgan can expand its asset base significantly from present levels due to its regulatory straightjacket, so I look for it to boost its dividend and buy back shares.