Ariel's Fidler Bets Surviving Banks Will Grow

CHICAGO (TheStreet) -- Timothy Fidler, a fund manager at Ariel Investments, says banks that survive the financial crisis will emerge as stronger companies. He's bullish on Morgan Stanley(MS), in particular.

Fidler co-manages the firm's Focus and Appreciation portfolios, which have earned three stars from Morningstar and are among the top-performing funds in their categories. The Ariel Focus Fund(ARFFX) has climbed 32% this year, outperforming 89% of its peers. The Ariel Appreciation Fund(CAAPX) has advanced 53%, beating 97% 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?

Fidler: Bullish. There has been a great deal of attention paid to the recent rally, suggesting that the market has moved up too far, too fast off of the March lows, running up faster than fundamentals would suggest. However, this line of thinking assumes that stock prices were at rational levels earlier in the year. We think first-quarter prices were more a function of the overwhelming fear that consumed the market at that time, rather than a rational assessment of long-run business values.

Current stock market valuations are not excessive and are reflective of where we would normally be in a typical recession as opposed to the "end-of-the-world" scenarios being discounted back in March. We think the investment community is undervaluing the massive cost-cutting that has taken place over the last few quarters. When we get some relief on the top line, companies will enjoy material operating leverage that's not considered in consensus earnings estimates.