LAGUNA BEACH, Calif. (TheStreet) -- John Buckingham, manager of the Al Frank Dividend Value Fund (VALDX) , says technology companies Intel (INTC) - Get Report, Microsoft (MSFT) - Get Report and IBM (IBM) - Get Report offer cheap shares and strong profit potential.
The $17 million fund, which garners three stars from
, has returned 45% during the past year. During the past three years, the large cap value fund has lost an average of 8.3% annually, better than half of its Morningstar peers.
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.
Are you a bull or bear?
For those who share our long-term time horizon, we are bullish, though our optimism is tempered by the massive rebound seen over the past 11-plus months and the uneven pace of the economic recovery, not to mention the concerns about the massive budget deficit. That being said, our bullish stance is supported by the current interest rate picture, which we continue to read as favoring stronger equity allocations.
The economy also has shown signs of recovery. Corporate profit margins have strengthened, with earnings beating expectations in the last few quarters at an even better than usual clip. Merger and acquisition activity has also picked up, another sign that the financial markets have returned to more normal operation. Significant monetary and fiscal stimulus, a "leaner" corporate America, the inevitable resumption of global growth and the mountain of cash on the sidelines will present opportunities for the three-to-five-year prospects for the brand of undervalued stocks we seek in particular.
What is your top stock pick?
We think that dividend-oriented investors may be overlooking one of our favorite names,
Diamond Offshore Drilling
, a leader in deepwater drilling and a provider of contract drilling services around the globe. Diamond pays a regular 12.5-cent quarterly dividend, which would suggest a paltry yield for an $85 stock, but the company regularly pays special dividends, the latest equaling $1.88. In fact, the total payout has been $2 per share in each of the last six quarters as earnings have been robust enough to support the generous dividend policy.
With profits likely to remain near current levels for at least the next several years, we see little risk of a significant cut in the dividend, with the $8 per share that was doled out in 2009 likely to be repeated this year and next. An inexpensive valuation and an effective yield of more than 9% is an attractive combination.
What is your favorite "sleeper" stock?
Chemical- based pharma specialist
continues its successful international expansion and now derives more than a third of revenue from overseas markets. Opportunities for growth abroad, recent aggressive cost-cutting initiatives, continued brand-building efforts, a 4% dividend yield, a solid balance sheet with nearly $2 per share in cash and book value of more than $5 per share leave our fair valuation far above the stock's current price.
What is your favorite sector?
While we believe in broad portfolio diversification and we do not make big bets on any one stock, industry or sector, we are favorably disposed to the technology sector as balance sheets are strong, profit growth potential is above average and valuations are generally attractive. Favored names in the large-cap area include Intel, Microsoft and IBM.
What sector would you avoid right now?
We do not have any sectors that we would shun at the present time, though we are light in our exposure to utilities as valuations are generally not compelling, despite handsome dividend yields.
Reported by Gregg Greenberg in New York
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.