BOSTON ( TheStreet) -- Billionaire investor Warren Buffett wrote an opinion piece for The New York Times on Oct. 16, 2008, saying he was moving all of his personal money into U.S. equities, citing widespread fear following the collapse of Lehman Brothers.
Five months later, stocks roared back to life. But, today, the U.S. economy is still limp, and many investors are pouring money into emerging markets and commodities, and pulling away from the S&P 500 and Dow. So now, two years on, an opportunity to buy on fear still exists, and those bets may pay off for investors in 2011, fund managers and analysts say.
Put another way -- in Buffett's own words -- "bad news is an investor's best friend." And there's certainly no shortage as we approach the New Year.
The U.S. is grappling with high unemployment and an elevated rate of foreclosures. Debt crises in Europe have forced bailouts in Greece and Ireland. Investors fear that monetary easing by the Federal Reserve in November will fuel inflation and create asset-price bubbles in emerging markets, such as China.And the hits keep coming. On Friday, China raised the reserve ratio for banks ahead of a key reading on November inflation in the People's Republic. Helped mainly by a surge in September and October, the S&P 500 has climbed 11% in 2010 and the Dow has added 9.5%, lagging behind last year's returns by a wide margin. But some contrarians are predicting that 2011 will be a winning year for investors brave enough to put money on the U.S. instead of Brazil, China, India, and industrial and precious metals. "I'm expecting a bigger U.S. recovery next year," says Marc Pado, U.S. market strategist with Cantor Fitzgerald. "We're in a much better position than we were years ago with our exports. We're seeing that in trade deficit numbers." Pado and other professionals say there are four major themes that will play out in the coming year. For one, U.S. stocks remain undervalued, specifically large-cap companies with pristine balance sheets. In addition, the Federal Reserve is so entrenched in its plan to stimulate the economy that it can't extract itself until lasting growth is achieved. More broadly, emerging markets will face inflation on food and other commodity prices, which could benefit U.S. companies. And lastly, the political climate -- which stifled the health-care, education and financial industries this year -- should become more accommodative of U.S.-based companies. John Buckingham, chief investment officer with Al Frank Asset Management, notes that the market has come a significant way from the early 2009 lows and even since the pullback in August. "I'm still optimistic for 2011, but investors should be paying fundamentals now even more so because we've had this significant rally," he says. Jeff Auxier, president of Auxier Asset Management and portfolio manager of the Auxier Focus Fund, says now is a good time to hunt for strong businesses with double-digit free-cash-flow yields. "It's an exceptional time to be a business analyst because no one is. They're in ETFs or whatever and they don't even know what they own," Auxier says. "Remember, the top 25 businesses in the U.S. over the last 30 years, like Wal-Mart, are up between 18,000% and 63,000%" Not that 2011 comes without pitfalls. Paul Nolte, director of investments with Dearborn Partners in Chicago, sounds cautiously optimistic as he lays out his case for 2011 as a year of two halves. "The front half is going to be very good because of the Fed intervention," Nolte says. "The back half might not be as good as we wait to see if the outcome is good. It's a lab experiment and we're doing this all on the fly. We don't have a blueprint." That said, Nolte and others expect several U.S. stocks to thrive in 2011. Read on to see the biggest investment themes for 2011 and stock picks to play on those ideas.