Shop Consumer Stocks, Withdraw From Banks

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.

If you liked this article you might like

Walmart Is One of 63 Companies Contributing Massively to Aid Harvey Relief

How Walmart and Costco Could See a Future Flush With Profits Thanks to an Abundance of Cute Puppies

The Haunting Truth Behind $6.9 Billion in Halloween Sales