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



. 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


, 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.

U.S. Stocks Remain Undervalued

John Butters, a research associate with Thomson Reuters, said the bottoms-up earnings-per-share estimate for the S&P 500 for 2011 is $95.77. Market observers note that a traditional 15-times multiple would mean the S&P 500 would reach 1436 by the end of 2011, an increase of 200 points, or nearly 16%.

The estimate for earnings of the S&P 500 companies is nowhere close to projecting increases, argues Pado, which means the market has a low hurdle to top. "As demand picks up, I think 1350 is a low-end target for next year," he says.

Robert Pavlik, chief market strategist with Banyan Partners in Palm Beach Gardens, Fla., says that at 13 times next year's estimates, the market is undervalued.

"Without even seeing any expansion in earnings, a 15 multiple is quite doable and maybe even conservative," he says. "At a 16 multiple, without any type of expansion in earnings, you're talking 1500 on the S&P 500. That's pretty reasonable."

Two arguments counter that view. The first is that buy-and-hold is dead. During the so-called "lost decade," large cap stocks -- and therefore the major stock indices -- went nowhere. It's hard to believe that will change in 2011. Second, as the chart above shows, the actual performance of S&P 500 earnings lags expectations over the several quarters dating back to 2006.

Cantor Fitzgerald's Pado, though, points out that U.S. corporations should see cash and cash equivalents held on balance sheets top $2 trillion by the end of this quarter, four times the average level. Companies hoarded this cash on double-dip recession fears, but now they will be forced to put it to use.

"That's what has been lacking in the valuation of the market," Pado says. "There's no rate of return, and they're not building their companies up. That's when you get buybacks, M&A activity and increased dividends."

Banyan Partners' Pavlik offers several stock picks across sectors held in client accounts at his firm. He finds value in the financial industry, and he views

Bank of America

(BAC) - Get Report

as a long-term investment.


(C) - Get Report

, he says, should "easily see $7 over the next year or so."

Among industrials, Pavlik looks to


(BA) - Get Report

ahead of the delivery of the Dreamliner 787 plane. "They've had a lot of hiccups in the production, but once that plane begins flying, people are going to jump all over that stock," he says.

Last, he said value can be found in the materials sector, noting that

FMC Corp.

(FMC) - Get Report

trades at 14.5 times next year's earnings estimate and

Cliffs Natural Resources

(CLF) - Get Report

only at 7.5 times next year's earnings.

Large-cap dividend-paying stocks are Buckingham's top picks for 2011, based on a hunch.

"I don't know. That's my honest response," Buckingham says. "But as a value manager and an equity investor, I want to be putting my money in inexpensively priced stocks. Ultimately, the value will get recognized. As Buffett says, if the business does well, the stock will follow."

Buckingham's focus falls on technology, targeting


(INTC) - Get Report



(MSFT) - Get Report

, even though the dividend yields are spectacular.

"The P/E ratios for each are in the 12 range," he says. "These are fantastic balance sheets loaded with cash. Earnings are expected to grow modestly and the downside risk is relatively subdued."

The Federal Reserve Won't Give Up

In November, the Federal Open Market Committee announced its intent to purchase $600 billion of Treasury securities. But the speculation over the quantitative-easing measures, dubbed QE2, heated up in July. The S&P 500 rode that speculation from July until November, good for a 16% climb in that four-month time span, as the timeline above illustrates.

Now, there is market chatter over a possible QE3 after Fed Chairman Ben Bernanke said in an interview with

60 Minutes

that more quantitative easing in the U.S. is "certainly possible." That may be due to the fact that QE2, which was designed to drive down interest rates, has had the opposite effect. The yield of the 10-year Treasury was below 2.5% in early November but has now jumped to nearly 3.3%.

Some market watchers say rising rates and a strong dollar aren't necessarily a great sign for the stock market. Others disagree and instead say this is a trend that better reflects a return to normality.

"If the economy is going to grow at a stronger pace, then rates should go up and the dollar should go up," Cantor Fitzgerald's Pado says. "The last 12 months wasn't normal because the Fed was stepping in doing major moves. We're now getting back to normal. It's not one or the other. They can all go up."

Banyan Partners' Pavlik says the dollar will continue to rally because of growth in the U.S., which investors may initially take the wrong way.

"You'll see an initial negative reaction in the overall market because things are more expensive," he says. "But as growth continues on, you're going to want to be where you see more growth. You really have to pay attention to what's happening and understand why the gyrations are occurring. You want to be invested in the U.S. market because growth is a good sign."

One of the obvious risks is that the 10-year Treasury yield grows at a faster clip than the market expects. In addition, Dearborn Parters' Nolte argues that the benefit of QE2 is not finding its way into the economy because fiscal policy, not monetary policy, is needed to see more robust economic growth.

"You can have QE3, QE4 and QE5," he says. "But no matter how much you throw at it, you're not solving the debt situation. That's really the part of the economy that needs to heal. And that'll take time. The consumer gets it, but it'll take a while to get their balance sheets back in order."

For investors looking to play the currency shift, Al Frank's Buckingham says multinational global companies are way to hedge the currency risk. "We like some of the big conglomerates like

United Technologies



(MMM) - Get Report



(ETN) - Get Report


Overseas Crises Benefit the U.S.

There's no shortage of drama when dealing with the PIIGS countries: Portugal, Ireland, Italy, Greece and Spain. The globe has already seen two of these countries bailed out and more could be on the way in 2011.

"The big negative is the sovereign debt and euro-zone issue, which will continue to be the thorn in the side of the global recovery for several years," Cantor Fitzgerald's Pado says, noting that the austerity plans are targeting 2014 and 2015.

It may be puzzling, then, to find that Pado is still bullish on the U.S. But the explanation he provides is remarkably simple.

"Our top trading partners are Canada, China and Mexico. You don't have any of the so-called PIIGS on the top 10 or 15 list," he says. "They have no economic impact in terms of our exporting. We don't import a heck of a lot either. The direct impact is overblown. The residual impact is far less than most people are concerned about."

Instead, market strategists are keeping a watchful eye on inflation overseas, which can directly benefit the U.S. As the chart above shows, commodities like cotton and grain have skyrocketed in 2010, which can lead to price inflation for countries abroad that are forced to import from the U.S.

Auxier takes the traditional route in finding U.S. companies that are in emerging markets but aren't trading at a premium, such as

Procter & Gamble

(PG) - Get Report



(PEP) - Get Report


Meanwhile, Dearborn Partners' Nolte expects that economically sensitive companies like


(DE) - Get Report



(CAT) - Get Report

will be top picks based on the continued rise in corn prices.

"The next bubble is rumored to be in farms," he says. "But when farmers get money, they put it back into the farms. They'll be buying and upgrading equipment. Plus, these companies do a fair amount of business overseas. As long as there is a steady growing demand for grains, these companies will do well."

With energy prices expected to stay firm, Nolte says investments in

Exxon Mobil

(XOM) - Get Report



(CVX) - Get Report

"make sense." He also names


(FCX) - Get Report

as a good metals pick.

On the other hand, Nolte says consumer stocks may actually be hurt by commodity prices because of input costs. For example, he says


will struggle a bit. "They may be able to raise prices, but the cost of input will go up," he says.

The Political Landscape Turns Favorable

It's no secret that political powers took a toll on financial, health-care and education sectors as government officials turned the industries into dartboards.

As the chart above shows, key education, financial and health-care stocks are down sharply this year.

But that was 2010. In the coming year -- the third of President Barack Obama's four-year term -- stocks are expected to outperform as political pressures bode well for equities.

"If you want to run for re-election, you care about the year you're running in," Cantor Fitzgerald's Pado says. "In order to make things good in year four, you have to get things going in year three. It takes a year before whatever fiscal or monetary measures show their full benefit."

It's not quite 2011 yet, but Americans have already seen Obama push for extending the Bush-era tax cuts in a bipartisan surprise. Additionally, the president has pushed for a $120 billion reduction to the Social Security tax.

Dearborn Partners' Nolte warns investors not to get too caught up in the excitement of the extension of the tax cuts.

"The Bush tax cuts do nothing because it's status quo," he says. "It avoids the negative change that we would've seen, but it doesn't necessarily improve anything. At the margin, they have changed some of the Social Security withholding. But they didn't do it on the corporate side, so if someone hires you, they'll have to pay what they had to pay before.

Nolte goes a step further and suggests the impact of politics is hard to handicap. "The political environment moves so slowly," he says. "Even if you look at ObamaCare, it took well over a year to finally come to fruition. While we can speculate now as to what might happen, there will be lots of time before anything gets done."

Auxier of the Auxier Focus Fund is willing to take on the risks of political pressure if others aren't. He has been buying a basket of education and medical-device stocks, which he finds compelling.

On the education side, he's focused on

Strayer Education

(STRA) - Get Report


Apollo Group



Career Education

(CECO) - Get Report

, noting that the sector is "really hated. It's been attacked, and it's really cheap."


(MDT) - Get Report


Abbott Labs

(ABT) - Get Report

, meanwhile, are in Auxier's group of medical-device stocks, which he calls "hopelessly out of favor" like the education companies.

"It's a reversion to the mean," he says. "It's like


(BP) - Get Report

, which we bought on the way down. You want to make sure, though, that these companies have the balance sheets to endure so you can get into some quality businesses that historically have higher premiums."

-- Written by Robert Holmes in Boston


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