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LOUISVILLE, Ky. (TheStreet) -- James Shircliff, manager of the Aston/River Road Small Cap Value Fund (ARSIX), says consumer-staples stocks are most attractive because they've proven to perform well in good times and bad.

The $531 million mutual fund, which garners three of five stars from Morningstar, has returned 51% over the past year, more than 91% of its small-company value peers.

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

Are you bullish or bearish?

Shircliff: I'm moderately bullish for 2010. Valuations are reasonable, and I expect the market to transition from the early low-quality, high-beta stage of the recovery to one distinguished by higher quality and lower volatility. This would suggest a focus on fundamentals in the year ahead. Another favorable trend is an increase in M&A activity, which began to emerge in the fourth quarter. Corporate balance sheets are flush with cash and, in a modest economic recovery, companies will be focused on acquisitions to drive growth. Firms with healthy balance sheets, solid growth prospects and great cash flows are our primary focus, and they make especially attractive acquisition candidates.

In 2010, there is an additional incentive for business owners to sell prior to an expected increase in the capital-gains tax rate. Other bullish factors for the small-cap space include a tightening of high-yield spreads, rising earnings estimates through at least the third quarter and perhaps a continuation of positive fund flows. However, with interest rates near zero, federal deficits through the roof and the government preparing to withdraw massive amounts of monetary stimulus, this remains a fragile recovery.

What is your top stock pick?

Shircliff: One of our top holdings is PetSmart ( PETM), the largest specialty pet retailer in North America. The business model demonstrated its resiliency last year by posting positive same-store sales in a terrible operating environment. PetSmart employs a modest amount of leverage but generates a substantial amount of free cash flow. This capital is used to grow its store base and is also returned to shareholders in the form of share repurchases and dividends.

We think the stock is cheap because Wall Street is concerned about gross margins and inflation's effect on the top-line, and is afraid of Wal-Mart's ( WMT) recent entry into pet food. Just last month, private equity firm KKR signed a deal to acquire Pets at Home, a U.K.-based pet-supply retailer, for over 13 times EV/EBITDA. PetSmart's forward EV/EBITDA trading multiple is under 6 times.

What is your top "sleeper" stock pick?

Shircliff: One of the core components of our investment philosophy is finding companies that are undiscovered by Wall Street. Avatar Holdings ( AVTR) is a real-estate developer and homebuilder with significant land holdings in Florida and Arizona. The company has no Wall Street coverage. There is a high degree of insider ownership, which aligns the interests of the management team with shareholders, but this also limits liquidity. Clearly, this is a contrarian pick, but we like how the company is positioned. Avatar's market cap is only $200 million, but it has over $100 million of net cash on its balance sheet and has been buying back its debt at significant discounts to par.

And, while most of its competitors are trying to raise cash and just survive, Avatar is acquiring real estate at significant discounts to its intrinsic value. Avatar purchased the gated retirement community Seasons at Tradition in Port St. Lucie, Florida, which has over 300 acres and includes over 1,000 lots with varying degrees of completion. It was originally owned by the now-bankrupt Levitt and Sons. When the development was acquired by the lender, Levitt still owed $86 million in mortgage loans on the property. Avatar acquired the property from the lender in September 2009 for only $7.3 million.

What is your favorite sector?

Shircliff: We are bottom-up investors, meaning we build a diversified portfolio one company at a time. Our focus is typically at the company level, not the broader industry or sector. That being said, certain sectors often present a more compelling universe of opportunities. Currently, we are overweight in consumer staples. The sector is typically defensive in nature, but we've found many companies that have sustainable business models, generate consistent cash flows and have strong shareholder-oriented management teams. These are firms trading at discounted multiples and can prosper in good times and bad.

Some of our larger holdings in this space include the Midwestern convenience-store chain Casey's General Stores ( CASY) and Ruddick Corp. ( RDK) -- the owner of Harris Teeter supermarkets. One of our newer holdings is Seneca Foods ( SENEA), the largest private-label producer of canned vegetables.

Which sector or stock would you avoid?

Shircliff: We remain cautious on the banking industry. We had modest investments in banks leading into the credit crisis, and we continue to be significantly underweight. The regulatory environment for banks remains highly uncertain, credit losses continue to climb, and it's not clear that in the future the banking model will merit the valuations we've seen in the past. There are still a lot of companies in the financials space with better prospects and more visibility than most banks.

-- Reported by Gregg Greenberg in New York.

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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