Pro Investors' Strategy Session for April

BOSTON ( TheStreet) -- Oliver Pursche, president of Gary Goldberg Financial Services, held his usual weekly team meeting as the first quarter came to a close and laid out the firm's strategy for April. As it turns out, nothing changed much at all.

After all, the Dow Jones Industrial Average notched its best first-quarter performance in more than a decade despite several major headwinds, ranging from a natural disaster that has crippled the world's third-largest economy, the potential for a nuclear disaster, and continued violence in North Africa and the Middle East.

The result of Pursche's recently concluded meeting was that nothing made his team rethink its overall global macro outlook. He says that, through April, the expectation is that the stock market will benefit from low interest rates, an increased demand for soft commodities and energy, and pickup in M&A activity.

April promises to bring a few surprises, though, in the form of corporate earnings results for the first quarter. Alcoa ( AA) unofficially kicks off the first-quarter earnings reporting season on April 11. Analysts are optimistic about the first quarter, predicting that earnings of S&P 500 companies rose 12.3% compared to a year ago, according to data collected by Standard & Poor's Capital IQ.

"We're not seeing a major change on the stock side, at least not going into April," Pursche says from his office in Suffern, N.Y. "We're actually surprised at the ongoing strength in the market. With all the activity in earnings, especially in the first half of April, we'll gain a little more clarity and whether shifts are warranted."

Investors historically have booked a winning April. Looking at data for the past 20 years, the S&P 500 has ended the month with gains 15 times at an average of 3.7%. Including the five years when the S&P 500 fell in April -- 2005, 2004, 2002, 2000, and 1993 -- the S&P 500 has an average return of 2% during the month.

Over the past five years, several stocks in the Dow have been better bets than others. For example, American Express ( AXP), Caterpillar ( CAT) and Intel ( INTC) were profitable trades for investors in each April of the previous five years. American Express, for example, was the best performer on the Dow in April 2010 and April 2009 with total returns of 10.6% and 74.7%, respectively.

The situation in the Middle East as well as Japan's struggle to bring its compromised nuclear reactors under control remain wild cards, but the market has shown it has been able to shrug off fears and move higher. Robert Auer, manager of the Auer Growth Fund ( AUERX), says he wouldn't be surprised to see the market pull back and digest its first-quarter gains early in April.

"The market is having trouble here at this level, so in the very near term, I wouldn't be surprised to see some consolidation," Auer says. "I'm very bullish overall."

Auer, Pursche, and other fund managers across the U.S. spoke with TheStreet about their current strategy and what they expect to do in April. This commentary, as well as a handful of equity picks from each fund manager, are detailed on the following pages.

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Tony Gleason and Richard Levine, Neuberger Berman Equity Income Fund

After so much money poured into the bond market from 2008 until 2010 due to the financial crisis and market collapse, fund managers like Tony Gleason are beginning to see that reverse as investors go in search of yield.

"People who bought bonds used to say they bought them for safety and income. Now it feels like you can buy bonds for safety or income, but you can't really have both," says Richard Levine, co-portfolio manager of the Neuberger Berman Equity Income Fund ( NBHAX). "If rates move higher, the value of those bonds will come down. We'd rather take some equity risk with some chance for appreciation."

For that reason, Gleason and Levine say many clients are fleeing the bond market to the fund, which recently passed $1 billion in assets amid solid performance and investor inflows. Annual returns on the fund's institutional class shares has outperformed the benchmark S&P 500 in each of the past four years.

Due to worries over inflation, the fund managers have been doing their best to prepare for an inflationary environment. Gleason says he and the other portfolio managers allocate the fund's assets across four distinct groups of securities: real estate investment trusts (REITs), utility stocks, convertible securities and other high-yielding stocks. One of their favorite themes is the increased worldwide demand for commodities, including oil, gas, coal and timber.

The focus on timber has brought Weyerhaeuser ( WY) to Gleason's attention, especially after the tree-harvesting company announced that it would transition into a REIT.

"What we like most about it is that they are going to being paying out a substantial amount of their cash flow as a dividend," Gleason says. "Second, they have an enormous amount of undervalued acreage that the REIT community wasn't quite aware of. Management is focused on shareholders, there is a nice payout coming our way, and it's a wonderful inflationary beneficiary."

Natural gas, though, is where Gleason sees a big opportunity for investors. Specifically, he's looking to diversified utilities, as he is intrigued about natural gas distribution, like pipelines and distribution networks. Like other market watchers, Gleason points to the nuclear issues Japan is still struggling with, arguing that natural gas will take up the slack that nuclear power is going to leave.

Specifically, Gleason singles out CenterPoint Energy ( CNP), which is an electrical distribution and transmission company with exposure to natural gas. The stock currently has a 4.5% dividend yield, which attracted income-oriented investors like Gleason.

"The company has a business model that we think has good long-term growth prospects and the ability to continue raising their dividend," Gleason says. "Good valuation, good management. People hunting in utility land would be well served to get onboard the natural gas growth."

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Oliver Pursche, GMG Defensive Beta Fund

Pursche, manager of the GMG Defensive Beta Fund ( MPDAX), doesn't buy the wisdom behind "sell in May and go away," premised on slow summer months. Market timing is a futile exercise, he says, which is why he is sticking with a defensive stance. Specifically, Pursche is keeping a focus on large-cap multinationals, which are growing businesses aggressively in emerging markets, strong free cash flow and a history of increasing dividends.

With about $500 million in assets under management at his firm and about $20 million in the fund, the most interesting dividend name that emerged from Pursche's latest strategy session was Intel ( INTC). Pursche says his team sticks with 15 names in the S&P 500 and S&P 100 that are the highest-yielding and high quality, which is why Intel comes as a bit of a surprise.

"You never think of Intel becoming a dividend aristocrat, but it's on its way," Pursche says. "It has underperformed the market and technology as a whole. It's a valuation play more than anything else. Intel is a core holding over the next 12 to 18 months, thanks to the 3.6% dividend. As a result of the recent selloff on the fears of supply-chain disruption in Japan, we think this is an attractive point to get in."

Pursche notes that his firm is increasing rotation into some small-cap stocks in the biotech, pharmaceutical and technology spaces. "That's where the growth is, especially in the emerging markets," he says. But the firm's defensive stance has several other interesting large-cap names looking more attractive.

Based on expectations of a full recovery in Japan, Pursche likes Cliffs Natural Resources ( CLF), which is the world's largest iron ore producer. "They're very well positioned by having a lot of mines in Australia," Pursche says. "That's very favorable for the Asian infrastructure rebuilding and expansion. Once the issues in Japan stabilize, particularly the nuclear problems, iron-ore demand is going to continue to climb."

Following consolidation among beer makers, Pursche says Molson Coors ( TAP) has become one of the firm's unlikely picks. He points out that the company is well-positioned to pass on the costs increases in barley, hops and even water while also arguing that valuation is "pretty attractive."

Lastly, Pursche says that farming-equipment maker Deere ( DE) has done an "absolutely fantastic job at growing their businesses in Asia as well as Latin America." He says that the company has strong and growing profit margins, so despite share price appreciation, there is still upside left in the stock.

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Kent Croft, Croft Value Fund

After the market's breakout first-quarter performance, investors would likely assume that long-term value investors are having a hard time finding stocks at attractive valuation. Kent Croft, manager of the Croft Value Fund ( CLVFX), says many of the geopolitical and natural disaster events have created opportunities for investors to buy solid companies at reasonable multiples.

"We're not at a loss for finding new ideas in this market," Croft says, although he stops short of saying he's a stock picker. "Many companies are selling for less than 10 times earnings, and others selling at good discounts to net asset values or private market values. Given all the uncertainty out there, it's important to know your company from a stock picker's point of view."

Rather than buying a sector, Croft says investors should be comfortable with balance sheets, examining how these companies have weathered tougher times in the past. It's as important as ever to be research-focused and to know your companies, he says.

Croft says investors still need exposure to companies leveraged to a global economic rebound, which is where he sees a lot of potential. The fund owned stocks like Caterpillar ( CAT), United Technologies ( UTX), General Electric ( GE) and Honeywell ( HON) before the earthquake and tsunami in Japan, and continues to own them as they should benefit from the country's rebuilding.

Like Pursche, Croft is also a fan of Deere ( DE), saying that he likes the agriculture industry because it operates independent from the normal business cycle. He also owns Mosaic ( MOS), Monsanto ( MON) and even Valmont ( VMI), which makes irrigation equipment for more efficient use of water.

Turning to the U.S., Croft also likes Lowe's ( LOW), which is one of the fund's largest holdings. Croft says the company offers investors visibility of earnings growth over a multi-year period as the housing market rebounds.

"We're not looking for a knee-jerk or big rebound any time soon, but Lowe's is positioned to deal with a prolonged recovery in housing," he says. "They picked up market share in the downturn, so coming out of this, they should have greater earnings power. It's a multi-year process but Lowe's should participate along the way. At some point, housing has to come back."

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Robert Auer, Auer Growth Fund

Auer, manager of the $228 million Auer Growth Fund ( AUERX), says he's used to dealing with angry investors to begin the month of April. As a retail broker for 21 years at Morgan Stanley ( MS), he saw the pains of tax season first hand.

"I was always cautious from April 1 until April 15 because tax season puts everyone in a bad mood," Auer says. "People who owe on taxes are typically wealthy and are stock investors, and sometimes they have to re-juggle their portfolio. If they didn't withhold enough, they need to get some money to pay. For that reason, I wouldn't be surprised to see the market stall out at this level."

Auer's investing strategy differs from other portfolio managers in that he only invests in companies with 25% increases in profits and 20% in revenue while also carrying a price-to-earnings ratio below 12. His portfolio has more than 100 stocks across all market caps.

After companies posted corporate earnings for the fourth quarter, Auer scratched many ideas off his list due to P/E ratios that grew too high. But he currently says that the bond market is "close to a tipping point," and that bond-scared money will come back into equities. "It will have no place to go. It could be huge, it could be explosive," he says.

Auer has had recent success with many of his stock picks. In September, he told TheStreet that he was investing in Micron ( MU) and Marathon Oil ( MRO), both of which are up 60% over the past six months. His fund also owned Cephalon ( CEPH), which was recently acquired at a rich premium.

Looking ahead to April, Auer is a fan of Teva Pharmaceutical ( TEVA), which is a leading maker of generic drugs. The stock, which is currently Auer's largest position, is trading below a P/E ratio of 10 based on this year's earnings while it continues to grow at very high rates, Auer says. "For the risk/reward, it's fabulous at the $50 level," he adds. "We think the stock should be $100."

Veeco Instruments ( VECO), a manufacturer of diodes for LED lighting, is "growing wildly," Auer says, as LED lighting becomes more popular. While he notes the stock is extremely volatile, he says it trades about 10 times this year's earnings and has "fantastic" growth potential.

-- Written by Robert Holmes in Boston.

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