5 Top Stocks for Market Rally of 2011

BOSTON (TheStreet) -- U.S. stocks' time finally may have come.

Investors, encouraged by a brightening economy, are pouring money into domestic shares and pulling money from emerging markets. With the S&P 500 Index rising at twice the average monthly pace of last year, the smart money is betting on out-of-favor large-cap stocks.

U.S. equity funds attracted $20.6 billion in the five weeks through Feb. 2 as emerging-market equity funds posted their third straight week of outflows in early February, according to EPFR Global. Funds that invest in Europe and Japan have also seen inflows in recent weeks, a trend that continued through Feb. 9.

The fund-tracking firm said Friday that emerging-market funds have had "their worst three-week run in three years, as questions about the economic, political and policy implications of higher inflation continue to dog this asset class."

That money is going to some Japanese and European stock funds, but the bulk of it is going to be invested in blue-chip U.S. stocks, as investors seek to reduce risk while having an opportunity for share-price gains.

For example, fund-consulting firm Strategic Insight reported that investors deposited a net $21.4 billion to U.S. stock funds in January, the biggest monthly increase since a net inflow of $23 billion in February 2004. The last time there had been positive inflows to domestic stock funds was last April.

The S&P 500 is up 2.4% this year after gaining 15% in 2010. But that may be just an inkling of what's to come because fund managers must put all that new money to work in U.S. companies.

So here are five U.S. -based, but international, companies still growing at a fast enough pace to potentially attract new investors and yet carry relatively low valuations. They could benefit if investors are cautious and come back to the market with the view that they prefer quality and slow growth to rocketing returns:

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3M ( MMM), an international giant with a market value of $65 billion, is probably best known by the general public for its Scotch tape and Post-It notes. But, for investors, it represents a virtual one-stop shopping spree for those seeking a diversified investment portfolio. That's because its product line includes everything from electronics and health care to chemical adhesives and office and security products.

Its annual revenue is $27 billion and it had earnings of $5.75 per share in 2010.

The St. Paul, Minn.-based company gets a four-out-five-star rating from Morningstar for its steady-eddy financial performance over the years.

A Thomson Reuters poll of analysts finds seven "strong buy" ratings, five "buy," four "hold," and two "reduce" ratings.

The same group gives shares a 12-month price target of $102, a 12% premium to the current price. It has a 2.4% dividend yield.

Its share-price performance has been poor. Shares fell 7% in 2010 and are up only 1.9% this year. In an obvious move to boost prices, on Feb. 9 the company raised its quarterly dividend by 5% to 55 cents per share and 3M's board approved a $7 billion stock buyback program.

State Street ( STT) loves 3M, holding a 5.4% stake in it, about double that of the next-largest institutional investor and little changed in percentage terms over the past two years.

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Cummins ( CMI), the diesel engine maker, is benefitting from booming worldwide demand for it equipment used in trucks, buses and in industrial machinery. The Columbus, Ind.-based company gets half of its sales from outside the U.S., where it is recognized as a high-quality brand.

It gets a "five-star, strong buy" rating from Standard & Poor's, the ratings firm's highest such rating, based in part on its projected revenue increase of 22% for 2011, which comes on top of a similar increase in 2010.

It finished 2010 with a record fourth quarter, seeing a 22% increase in revenue for the period and $1.85 per share, resulting in annual earnings of $5.28 per share, more than double that of 2009.

A Standard & Poor's analyst writes that "North American truck engine sales should pick up in 2011 on pent-up demand and as customers become more comfortable with new engines being sold to meet more stringent (government) emissions regulations," as well as due to companies' need to replace their aging truck fleets after putting off capital purchases during the recession.

He also wrote that the booming economies' of India, China and Brazil, and infrastructure projects in those regions will keep demand growing.

S&P gives the company a $140, 12-month price target, about a 28% premium to its current price. Cummins shares are up 1% this year and 115% over the past year. Diversified industrials stocks, Cummins' category, have gained 4.5% this year.

To sweeten the pot for investors, on Feb. 8 Cummins announced a $1 billion share buyback. It has a market capitalization of $22 billion.

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Monsanto ( MON) is a way to play the run-up in world agriculture prices as the St. Louis-based company is one of the world's leading providers of seeds, herbicides and biotechnology aimed at boosting crop yields.

The company, with a $40 billion market capitalization, has a presence in more than 100 countries and posted revenue of almost $11 billion in 2010 and a profit of $2.01 per share.

The firm's seed and genomics segment generated 89% of companywide gross profit in 2010, while its herbicide segment contributed the rest.

For fiscal 2011, analysts estimate the company will earn $2.83 per share, says Standard & Poor's summary of analysts' opinions. And that it will grow by 19% to $3.36 the following year.

Its shares fell 13.5% in 2010 and are up 5.8% this year. It has a five-year, average annual return of 14% versus the S&P 500's 3%.

S&P's summary of analysts' opinions includes: four "buy," five "buy/hold," 12 "hold" and two "sell" ratings.

But S&P itself rates the company "hold," but with a still-solid rating of three stars out of a potential five. Its reason for caution and the "hold" rating is that there is the potential for earnings volatility due to Monsanto's exposure to global agricultural markets and currencies, adverse weather, unfavorable legal and regulatory developments, and risks relating to enforcement of intellectual property rights.

But it said that's offset by its relatively low exposure to economic cycles and its history of consistent cash flow generation.

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BlackRock ( BLK) provides asset-management services primarily for institutional investors, which accounts for more than two-thirds of the firm's assets under management of $3.5 trillion.

Based in New York, it offers an array of equity, fixed income, multi-asset class, alternative investment and cash management products, as well as its BlackRock Solutions investment systems, risk management and advisory services.

BlackRock leap-frogged ahead of the competition in terms of asset size in the investment-management business with its December 2009 purchase of Barclays Global Investors.

Standard & Poor's says that for fiscal 2011, analysts' consensus estimate is that BlackRock will earn a hearty $12.35 per share and that will grow by 14% to $14.14 in 2012.

The ratings firms says analysts views on its shares are: four "buy" ratings, seven "buy/hold" and four "hold." Its shares are up almost 10% this year and it gets a four-star rating from Morningstar and another seal of excellence from the Fidelity Contrafund, given its 1% investment stake.

S&P has BlackRock rated "hold," but notes that it expects "investors to continue shifting assets out of cash and fixed-income products into equities and alternative assets, which we think will result in higher investment-management fees contributing to (its) earnings growth."

It projects company revenue will increase 13 % in 2011.

BlackRock's shares fell 16% last year. The five-year annual average return is 10.4%. The firm has a market capitalization of $38 billion.

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KLA-Tencor ( KLAC), a Silicon Valley high-tech company, is a key player in the semiconductor industry, offering products that help chip makers and data-storage firms improve their manufacturing processes. Its field is known as process control and services.

The company, with a market capitalization just under $8 billion, gets a top rating from Zacks Investment Research in its ranking of large-cap stocks that are both outperforming the market and still have attractive valuations.

The semiconductor, or chip, industry is its core focus area. It also offers products that serve the wafer-manufacturing, data-storage and other industries.

That's even though its shares are up 20% this year after gaining 9% in 2010 and 69% in 2009. The semiconductor and materials sector is up 9.3% this year.

A Morningstar analyst writes that the company "occupies a sweet spot in the chip-equipment industry because of its dominant position in the process diagnostic and control (PDC) market. Chipmakers use PDC tools to measure and detect defects during semiconductor production and to identify and correct the problem sources; this lowers costs by reducing the number of faulty chips produced."

KLA-Tencor has a 50%-plus market share of its particular industry niche and has steadily gained share in recent years. Among its customers are Intel ( INTC) and Taiwan Semiconductor ( TSM), which have both announced capital spending increases that will benefit the company directly. On the downside, it is in the highly volatile and deeply cyclical semiconductor industry.

On Jan. 27, KLA-Tencor announced quarterly earnings of 1.10 per share, beating analysts' views by 4.3%.

Thomson Reuters' roundup of analysts' views found three "strong buy" ratings, six "buy," nine "hold" and one "sell." That same group has a mean price target of $47, a slight premium to the recent price of $46.20.

S&P gives the company's shares a four-star "buy" rating and a 12-month price target of $35. The ratings firm's analyst says in a research note that "our buy recommendation reflects valuation as well as our optimistic view of demand from foundry and logic customers."

>To see these stocks in action, visit the 5 Top Stocks for the Market Rally portfolio on Stockpickr.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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