Tobacco Can Do You Some Good: Five Spot

NEW YORK (TheStreet) -- Charles Norton, manager of the Vice Fund(VICEX Quote), says tobacco stocks are among the best buys because demand has stayed strong despite the recession.

The mutual fund has risen 7.5% this year, trailing the S&P 500 by 5.5 percentage points. Over the past three years, the Vice Fund has returned an annual average of 3.4%, better than 91% of its rivals.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.

Are you bullish or bearish?

Norton: At current levels, we're pretty cautious near-term, simply because melt-ups like the market has experienced over the past three to four weeks are unsustainable and, in our opinion, an economic improvement and everything else going right in the world are now adequately reflected in the price. But at the Vice Fund, we're primarily focused on the tobacco, beverage, gaming and aerospace/defense sectors, and within that universe, we're finding ample opportunities. Our target sectors are less dependent on economic growth than others and, in general, offer earnings stability, dividend security, high visibility and reasonable valuations in an otherwise uncertain market environment.

What is your top stock pick?

Norton: Our top pick, and the largest holding in our portfolio, is Philip Morris International(PM Quote). First, the trends within international tobacco are extremely favorable, with pricing power strong and major competitors concentrating on revenue as opposed to battling over market share. Philip Morris, specifically, has improved its focus on innovation around the Marlboro brand with various line extensions and new packaging. It's the industry price leader. It has broad, geographic exposure and robust, relatively low-risk earnings growth in an otherwise uncertain market. And the company is also cutting costs and aggressively buying back stock. Plus, its dividend yield is over 4.5%, and dividends could edge up.