Needham Asset Management's Bernard Lirola says there's too much bullishness in the stock market.


He's sticking with small technology and consumer companies for his $12 million Needham Aggressive Growth Fund ( NEAGX), which is rated five stars by Morningstar ( MORN). The mid-cap growth fund is up 9% this year, tripling the 2.8% gain of the S&P 500 Index. The fund has lost 1.8% a year, on average, in the past year, but gained 4.5% in the past five.

Lirola shares his stock picks in today's Fund Manager Five Spot, where America's top mutual fund managers offer their investing views in five fast and furious questions.

Are you a bull or bear?

Lirola: Valuations are in the middle of the fairway. I am neutral as the upside potential from things like the pickup in housing and the impact of stimulus fairly matches the downside risk of deteriorating employment and too much bullish sentiment.

What is your top stock pick?

Lirola: Actuate ( ACTU) is our top pick. The company is developing intranet and extranet applications in open code. The company is run by its colorful founder, Pete Cittadini, who is dedicated to growth as well as profitability. It recently bought back a significant amount of stock at $3.50 and is expected to grow its EPS in 2009, not a small feat when over 50% of its revenue comes from the financial sector.

Actuate delivers great functionality at attractive prices and facilitate large enterprises transacting with their customers online, a long-term growth trend for the company. This company should get taken over sometime by the likes of Oracle ( ORCL).

What is your top "beneath the radar" or "sleeper" stock pick?

Lirola: FCStone ( FCSX) is our favorite sleeper stock. This commodity adviser/broker trades at its cash value of $90 million. Yet, it currently earns about $15 million yearly pretax in its core advisory segment even though it earns at present virtually no interest on its customers' deposits. It earned $48 million in interest income in fiscal 2008.

It is a way to play an uptick in commodity prices as FCStone would benefit from increased customers' transactions. FCStone is being penalized for the major mistake it made in losing over $80 million from an energy account. I believe it was a one-time event in extraordinary illiquid market conditions and that FCStone has substantially lowered its risks. Tangible book exceeds $5 a share.

What is your favorite sector?

Lirola: It remains consumer discretionary, even though the sector has appreciated quite a bit from its March lows. The surviving companies will benefit from rebounding consumer demand in 2010, reduced competition after the bankruptcies of some competitors and increased profitability from leaner inventories and reduced offerings. I like CarMax ( KMX), which is gaining share both from the shift to used cars, and the disappearance of smaller dealers.

What sector or stock would you avoid?

Lirola: I would avoid health care services, which faces a prolonged period of uncertainty as the government seeks to rein in providers costs.
Before joining, 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.

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