Top Fund Manager Finds Fewer Bargains

NEW YORK ( TheStreet) -- James Potkul, manager of the Bread & Butter Fund ( BABFX), says it's more difficult to uncover unloved value stocks because investors are snapping up all types of companies in the stock-market rally.

The mutual fund has risen 23% this year, compared with 18% for the Standard & Poor's 500 Index of the largest U.S. companies. Over past year, the Bread & Butter fund has gained 0.4% during the bust and boom, better than 96% of its peers tracked by Morningstar.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.

Are you bullish or bearish?

Potkul: Currently, I am neutral to bearish. After this record-breaking rally off the March lows, I am finding fewer stocks that are undervalued when applying our contrarian value strategy. Also, I believe we are living through a once-in-a-lifetime economic event, and that the economy is resetting a few notches lower to a new base of economic activity going forward. With the shadow banking system practically disappearing and credit being allocated in a more rational manner, except government stimulus schemes, I cannot see how economic activity can bounce back to pre-2008 levels for some time to come.

What is your top stock pick?

Potkul: My top stock pick is Philip Morris International ( PM), the largest international tobacco company in the world with seven of the world's top 15 brands, including Marlboro, the No. 1 cigarette brand worldwide. The company has all the characteristics of a solid defensive stock that offers a growing dividend stream. Although Philip Morris is in a controversial industry, it has no exposure to the highly litigious domestic market.

Plus, it has a presence in many of the fastest-growing developing countries in the world. Philip Morris is transacting business in foreign currencies, which can hedge against the dollar's long-term decline. And the company has pricing power -- the flexibility to raise prices over time. The tobacco business has high barriers, as most are usually government-owned entities, so new entrants are very limited.

What is your top "beneath-the-radar" stock pick?

Potkul: My pick is Loews Corp. ( L), the diversified holding company run by the Tisch family. Loews can be described as a mini- Berkshire Hathaway ( BRK.A) since both the Tisch's and Berkshire Hathaway Chief Executive Warren Buffett have described themselves as value investors. Also, both companies are structured as a holding company that has both wholly owned operating companies as well as majority ownership stakes of publicly traded securities. Both place a great emphasis on prudent balance-sheet management and high levels of liquidity.

Loews has a fortress-like balance sheet with plenty of excess cash to fund all subsidiary cash needs and additional acquisitions. Management follows a disciplined contrarian value philosophy, which has kept the company out of the hyped-up bubble investments of the past decade while preserving shareholder value. Cash and liquid investments have been a strategic asset for Loews over the years to seize opportunities in distressed times and to be self-sufficient in its funding requirements.

What is your favorite sector?

Potkul: I am focusing mainly on high-quality multinational companies comprising strong franchises that possess a broad range of global products and services, presenting the highest probability of positive returns when integrated with our portfolio. Multinationals pay a solid dividend, have some pricing flexibility, are defensive in nature, have a presence in emerging markets and offer a currency hedge to offset dollar weakness over the long term. Most are trading at a premium to the markets, so it is important to try and buy on dips. In the end, the price you pay matters so an attractive, or at least reasonably attractive, purchase price is important to your long-term return.

What sector or stock would you avoid?

Potkul: I would avoid many of the large money-center and investment-banking stocks. The stock prices within this sector have had very large recoveries off the bottom and are discounting most of the favorable news going forward. This sector remains opaque, with most financial reporting lacking transparency, which makes it challenging to arrive at a true valuation of these securities. In addition, these banking institutions remain heavily reliant on government support schemes and programs.

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.

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