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Forget About the Fed, Focus on Stock Picks

Gregg Greenberg

It is possible, believe it or not, to make money in stocks without obsessing about the Fed's next rate decision or the upcoming employment report.

"We don't tune out the Fed entirely," says Matthew Kaufler, portfolio manager for the Touchstone Value Opportunities fund. "It's just not a priority for us." Kaufler and his co-managers use a bottom up method for selecting stocks, focusing on a company's ability to generate and sustain a high level of cash flow.

From a shareholder's perspective, Kaufler's priorities seem to be very much in order. The $112 million fund is up 8% year to date, 2.5 percentage points better than the S&P 500. The fund has returned an average of 16% annually over the past five years, a hefty 4.6 percentage points better than the index.

That's not to say that the fund's managers run away upon first sight of Fed Chairman Ben Bernanke. They have, in fact, "poked our heads up now and then" with great success.

"If we see a contrary sign flashing red then we know we need to act. For example, we began underweighting financials 18 months ago because we believed that the credit cycle would roll over," says Kaufler. "We may have been early, but it ended up being the right move."

Another prescient move was the fund's decision to invest in infrastructure stocks like the Shaw Group(SGR Quote - Cramer on SGR - Stock Picks).

"The ability to generate electricity in the U.S. has been stagnant for years but demand has increased," says Kaufler about the forces driving the power plant provider's business. "Think about how many appliances you plug into the wall today compared to even a decade ago: iPods, Blackberries and cellphones. Plus we are online constantly."

And, of course, Kaufler loves Shaw's international business, especially China, which is putting up power plants almost as fast as it's putting up another of Kaufler's favorite companies: McDonald's(MCD Quote - Cramer on MCD - Stock Picks).

"McDonald's two most profitable areas are Russia and China," says Kaufler. "Think about the expansion possibilities in those huge markets!"

As a value investor, he's also thinking about Mickey Dee's returning cash to shareholders via dividends and buybacks. He also likes the fact that the company is converting more of its restaurants to franchises as opposed to company stores.

"It's a better model for McDonald's to be a toll-taker collecting royalty payments than a caretaker of company stores," says Kaufler. "It's easier to predict cash flows that way."

And certainly much easier to predict than the Fed's next move.