Looking Past Scandal for a Few Good Managers

2. What stocks and sectors look best to you right now?

We are still heavily weighted in consumer discretionary and financials. We still like insurance companies, media companies and, in some individual instances, retailers.

In the Mid-Cap fund, one of our recent purchases is Willis Group Holdings(WSH Quote), the third-largest insurance broker in the country behind Marsh & McLennan(MMC Quote) and Aon(AOC Quote).

In our opinion, the insurance-broker business is an inherently attractive one. You get highly predictable future cash flows. It's a consolidating industry so you have the opportunity to increase market share. Plus, it's a product that is increasingly necessary for customers. We've spent a long time assessing the management team. The chief executive, Joe Plumeri, comes from Citigroup(C Quote). Willis has a very aggressive sales culture, which is vital in that business. They are very focused on increasing shareholder value; I believe 60% of the employees own company stock.

Earnings per share should be up 35% this year. While that level isn't sustainable, we think they can grow at 15% a year over the long haul. The stock is currently trading at a multiple of 13 times free cash flow, and the stock is trading at 12.8 times our earnings estimate for next year. They have managed to post return on equity in the low 30s; it's a very strong company.

Another company we like is Hewitt Associates(HEW Quote), a human-resources outsourcer and consulting firm. We purchased it at around $24 in September and it's now up around $30. It's a tremendous brand name that has been built up over 60 years; they have had 42 consecutive years of revenue growth. Most of those years were double-digit growth -- 2003 was one of the four that was single-digit. The stock fell a bit and so it presented us with a buying opportunity.

We are extremely impressed with the company. We wanted to own it for a long time. It came out of an IPO about a year and a half ago -- it listed at around $22-$23 and then surged to $34. We thought we missed our chance, but they brought down guidance a bit and presented another opportunity.

It's a tremendous business franchise. They are the best integrated human-resources company, providing the whole spectrum of services -- they even compete with Automatic Data Processing(ADP Quote) on check processing. Their outsourcing business is impressive and remarkably "sticky" -- they have a 95% retention rate in their three- to five-year contracting business. Their health care consulting business is growing -- companies are increasingly blaming bad quarters on skyrocketing health care costs, so they go to Hewitt to cut costs. Companies are also worried about underfunded pension plans, so they go to Hewitt for help in saving costs. There are big tailwinds in its favor.

They are supposed to earn about $1.37 next year. I don't see any reason why you can't put a [price-to-earnings] multiple of 26 on forward earnings -- ADP and Paychex sell at very high multiples. I'd say a $36 stock is the high-end price target, mid-to-high $30s -- and we are very confident in their ability to perform.