Matthew Gershuny // Portfolio Manager // Parnassus Mid-Cap (PARMX)

Comments & Outlook

The US economic recovery has been driven largely by monetary easing. As such, we continue to view the market with our customary skepticism. We’ve analyzed the potential earnings trends and believe that an earnings deceleration is forthcoming, which is especially disconcerting after the market’s latest upside move.

Given the significant headwinds, including Europe’s continuing debt crisis and the slowdown in China, economic growth is likely to remain anemic.

Recommended Strategies

We look for companies that have a sustainable competitive advantage, an increasing relevancy to the economy, and a management team that’s skilled at capital allocation.

We’re also mindful of risk, particularly the potential for a permanent loss of capital. As part of our effort toward risk mitigation, we analyze a company according to environmental, social and governance factors. This approach helps us avoid companies whose operations put them at risk of litigation or regulatory penalties.

Finally, a compelling name must be increasing its intrinsic value over time, while trading at a discount to our valuation.

What to Buy Now

Waste Management (NYSE: WM) specializes in waste removal, recycling, and converting waste to energy. Its wide competitive moat derives from its vast network of landfills and recycling plants, which would be difficult to replicate because of opposition to building new facilities at the local level. In the near term, Waste Management should produce revenue growth in the mid-single digits through pricing and volume. But over time, its new restructuring program should pare costs significantly, which could drive 8 percent to 10 percent earnings growth. Its shares currently yield 4.5 percent.

Compass Minerals (NYSE: CMP) primarily mines rock salt used during the winter for de-icing. Although the company earns the majority of its revenue from salt, it also generates almost 20 percent of sales from its sulfate of potash business, which is used as fertilizer for high-value crops. The stock is down from its high in early 2011 because of the recent mild winters, but the company should have substantial earnings power during a normal winter. The stock currently yields 2.6 percent.

Stephen Hammers // Portfolio Manager // Compass EMP Alternative Strategies (CAIAX)

Comments & Outlook

One of the reasons we’ve seen such big swings in the market is that it’s climbing a wall of worry due to uncertainty over the upcoming election. Investors are wondering whether the next administration will have a more pro-business attitude or if the status quo will prevail. Until there’s greater clarity, companies will be hesitant to reinvest in their own businesses by hiring more workers.

For growth investors, US equities are still the best place to be over the next 12 months. Meanwhile, income-oriented investors should stick with short-term US Treasuries.

Recommended Strategies

Investors should take a cautiously optimistic stance by staying long US equities, but remaining prepared to increase their cash position on any down moves of 10 percent or more. If you’re trying to make more than the 1 percent offered by Treasury bonds, you must be in stocks; there is a lot of potential for growth there, but you have to be prepared to limit your downside. I’d also suggest using a dollar- cost averaging strategy to take advantage of small declines.

What to Buy Now

We focus on broad indexes rather than stock selection, and for growth investors, the S&P 500 is a great place to be right now.

If you’re trying to pick individual stocks, choose less volatile names from among the consumer discretionary and consumer staples sectors, as well as utilities.

At this point, income investors should focus on short-term Treasuries; they’re not going to get a lot of yield, but high-yield bonds are poised to fall as much as 20 percent quite quickly considering the remarkable run they’ve had.

I’m normally bullish on commodities, but because of slowing economic growth, investors need to be very cautious in this space. If you’re willing to hold for the long term, commodities are still a great purchase.

However, I’m not a fan of indexes that are heavily tilted toward the energy sector. Oil trades so erratically that it creates way too much volatility in portfolios dominated by energy plays.