A popular CNBC commentator recently remarked that it was very easy to remain "bullish in theory." Indeed, the conceptual case for owning stocks is strong thanks to improving profits, increased M&A activity, strong corporate free cash flow levels, and continued political support for the capital class.

Unfortunately, while it may be easy to remain aggressively long conceptually, investors cannot use theoretical profits to fund their retirements or kids' education. And as we all learned in the great bust of 2000-03, fundamentals like valuations, interest rates and profits do matter. Really, they do. So as my partners and I think about the opportunities in the equity markets, we must address these fundamental issues. In my opinion, applying these variables makes it more challenging to remain bullish in theory.

How high are stock valuations?

How much longer can corporate profit margins expand?

Where will interest rates be next year?

Are the stocks in my portfolio up a lot and fairly priced?

After observing a tremendous amount of good fundamental news priced into the wonderful bull market that began in 2002, I have become more ambivalent about the opportunities in the equity market. With the average stock up over 100% since the bull run started, and with the average price/earnings ratio approaching 20 times, the indices generally seem to be fairly priced to slightly expensive. Since valuation spreads have narrowed during this rally, fewer mispriced individual stocks exist. This does not mean that profits cannot be garnered in equities, but rather that profits will accrue less easily, and more to the nimble trader or fundamentally correct, disciplined investor. The indexer or buy-and-hold investor should find decent returns harder to come by.

My cautious position for most of last year mitigated some excellent calls on individual sectors and stocks, and big profits were made in homebuilders, managed care companies and select positions in energy, industrial, consumer and technology stocks. There were also a few duds, mostly in the "tech turnaround" space.

My firm continues to hold positions in most of the stocks mentioned in this column last year. Some of the largest and favorite positions include familiar names such as


(COP) - Get Report



(DSS) - Get Report



(CAT) - Get Report


Other names that are new to the portfolio include


(C) - Get Report



(PH) - Get Report




. Also,

Applied NeuroSolutions


, a micro-cap biotech idea, is quite intriguing as a value speculation (mostly because of its tiny valuation, so be careful).

Energy Keeps Running

Energy stocks have had a big run and have become the favorite long sector on Bubblevision, and many energy stocks are becoming fairly priced here. However, ConocoPhillips trades at a significant discount to its major, international peer group of


(XOM) - Get Report



(CVX) - Get Report



(BP) - Get Report


Royal Dutch


. Its 10 times P/E multiple on 2005 earnings pales to the 13 times to 16 times range on all of the others. If you still want to participate in the oil trade, ConocoPhillips remains my favorite.

Quantum, another past top selection, had a healthy run after its strong December-quarter results. However, recently the shares have pulled back to their moving averages, making for a good entry point. The company's turnaround has just begun and I would expect it to hit a 30-cent to 40-cent EPS run rate in three or four quarters and the stock to trade closer to the mid-single digits.

In the newer positions, Citigroup has become a top holding. Trading for only 10 times next year's profits and yielding 3.6%, Citigroup represents a compelling long-term value. The new CEO, Chuck Prince, has implemented procedures to resolve the company's legal and regulatory issues. As capital markets and M&A activity rebound, Citigroup's fundamentals should continue to improve.

Parker-Hannifin is a leading, global industrial motion control company. It supplies components and subsystems to most of the major capital goods industries. The company should benefit as capital spending continues to increase, especially in the raw material and transportation sectors. The shares currently trade for only 13 times calendar 2005 earnings estimates, which is too low for a global leading business with significant free cash flow.

webMethods represents another value idea in the technology turnaround sector. This company provides Internet-based application integration software and services, and it has posted two consecutive quarters of double-digit revenue growth and improving profitability. Corporate IT spending appears to be accelerating in this space as companies try to squeeze more efficiencies out of its existing technology base. The company's enterprise value is about 90% of revenue, comparing favorably to peers at 150% to 400%.

Applied NeuroSolutions appears to have developed the first definitive, specific test for Alzheimer's Disease. The company has entered into

a marketing and manufacturing agreement



, a global leading diagnostics company. This tiny stock represents one of the occasional "value concept" ideas we discover, and with only a $30 million fully diluted market cap, it represents a small price for a potentially lucrative market: Alzheimer testing. Applied Neuro has been trading by appointment lately at only $100,000 of average daily dollar volume, so be careful.

After reviewing some of our favorite long ideas, what don't we like? Quite frankly, the mass of stocks in the middle! The average stock that trades at 20 times profits with ordinary, 7% to 10% growth rates seems uninspiring. They could be big companies or little ones. They could make steel, routers or soda pop. They could populate the growth or value categories. But they are neither compellingly valued nor exceptional growth stories.

Perhaps that makes this the year of "extreme investing." That is, decent returns can accrue to companies with unsustainably low valuations or stunningly high growth rates. Think of investing in very cheap stocks like

KB Home

(KBH) - Get Report

and Citigroup at one extreme. Or purchase exceptional growth stories such as


(AAPL) - Get Report



(GOOG) - Get Report

. But avoid most of the ordinary stocks with average valuations.

Unlike 1999 (the year of the out-and-out liar), when many false story stocks profited, 2005 could truly become the year of the outlier.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Applied NeuroSolutions to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Marcin was long KB Home, Citigroup, Applied NeuroSolutions, Caterpillar and Quantum although positions may change at any time.

Robert Marcin is the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback and invites you to send it to