MORN) mid-cap blend peers. It has gained 4.3% annually, on average, during the past five years, outperforming two-thirds of competing funds. Welcome to TheStreet'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 a bull or bear? Frank: I am extremely bullish on our portfolio, not necessarily the market as a whole. I think too many investors base their confidence on the economic outlook instead of the individual valuations of their holdings. For example, in 2009, long before there was any sign of an economic recovery, our portfolio enjoyed an incredible rally. This was because our stocks were cheap. Now, while the outlook for the U.S. is cloudy, there are still phenomenal bargains in companies that will outperform the recovery, if you know where to look. What is your top stock pick? Frank: Our top pick is WellCare Health Plans ( WCG). This is a small health care company that went through some big problems, but now all their issues are resolved. It's a sub-$40 stock with $30 of cash per share that churns out $5 per year in free cash flow. Of course, when owning health care you must be aware of government regulation, but we think WellCare will actually benefit from the government forcing people into the system.
Even with the eventual passage of the bill, actual change is still years away. In the meantime, we collect our $5 in free cash flow per year. The company has walked away from unprofitable business in the past, so we think they can not only protect their cash flow but grow it as well. We have a price target of at least $80. What is your top "beneath-the-radar" stock? Frank: Western Union ( WU) could be a big winner this year. They are the biggest and best in the money transfer business. This business has an extremely high return on capital and a high barrier to entry. It deserves to trade at a premium to the market averages. Instead, it still trades at a discount, but to our delight, the savvy management team just authorized a huge buyback of stock. If retail inflows to the market begin this year, investors will be looking for higher quality businesses at great prices. Western Union fits the bill. What is your favorite sector? Frank: We love all types of pharmaceuticals right now, because their valuations are quite low due to fear of government regulation. Companies like NBTY ( NTY) are in the pharmaceutical industry but have little to do with health care in terms of the proposed bill. NBTY operates Vitamin World stores and sells mostly vitamins and supplements. When the details of the health bill are eventually finalized, investors will again focus on the fundamentals. The Frank Value Fund has a long-term focus, so we are prepared to buy and hold our companies for years. This enables our performance to reflect actual business strength, not short-term stock volatility or fear.
What sector or stock would you avoid? Frank: Valuations in the materials sector are baffling. Stocks like Monsanto ( MON) appear to be "story" stocks now, with impending inflation and the weak dollar driving a tidal wave of inflows without regard to valuation. This solidifies our belief that it's a stock picker's market. Materials stocks seem to have priced in robust earnings recoveries with significant growth, while stocks in other sectors have the bar set so low you could step over it. As value investors in the spirit of Warren Buffett, pre- Berkshire Hathaway ( BRK.A), we want to be in high quality stocks with low expectations. -- Reported by Gregg Greenberg.