Fund Manager: Safest Buys Are Cash-Rich

With a new stock blowing up almost every day, Wall Street has gone from equity market to mine field. Five-star fund manager Warren Koontz says investors can steer clear of trouble by focusing on a company's debt obligations and cash generation.

"We don't want any debt to be rolling over in the near term, so we are looking at debt expiration," says Koontz, who oversees the $430 million (LSGIX)Loomis Sayles Value Fund. "We also like cash. Not only cash-flow generation, but net cash on the balance sheet."

Like most mutual fund managers, Koontz has been hit hard by the bear market, down close to 37% year-to-date. Nevertheless, he is still beating the S&P 500 by 4.7 percentage points over the past five years. The fund holds nearly 70 stocks and has turnover of 41% per year.

One of his favorite stocks right now is pharma giant Wyeth (WYE), which he says has strong defensive qualities in a difficult environment.

"It's a very good cash flow generator," says Koontz. "The dividend yield certainly is not as high as some of the others at just over 3%, but it has a very good balance sheet and within the pharmas we really like their pipeline."

Outside of health care, Koontz likes McDonald's (MCD) balance sheet, as well as its prospects as more people trade down from restaurants like Applebees or Ruby Tuesdays (RT) to fast food or quick service restaurants.

"Their same-store sales and their growth has been stellar, particularly in this environment," says Koontz. "And the idea that customers are trading down is not only a domestic phenomenon but it's an international one. And they have strong international sales."