Cheap, Safe Stocks to Make Money in 2011

BOSTON ( TheStreet) -- The S&P 500 Index's decline of 4.1% in the past month has erased much of the year's early gains, resulting in a slim 2% upside through Friday, as analysts project slower corporate earnings growth and a slew of international uncertainties from Europe to Asia puts investors in defensive mode.

But that would be overlooking industries that have benefited from a shift out of riskier investments. The best U.S. investment managers are outperforming stock-market indices mainly by owning a mix of consumer, health-care and utilities stocks, along with select shares in technology and energy that are bucking trends.

The Vanguard Wellesley Income Fund ( VWINX), the Sequoia Fund ( SEQUX) and the Yacktman Fund ( YACKX) are three large and well-known mutual funds that are on track to produce gains for this year.

Those three funds, and some others, are ahead of changes in analysts' sector recommendations. Standard & Poor's shuffled its model weightings to a more conservative stance May 17, citing "increasingly sluggish U.S. economic data," as well as slowing global economic growth and European sovereign risk, to name a few of its concerns.

Worthy of particular note, the ratings firm moved consumer-staples stocks to a suggested "overweight" allocation from "market weight" because the sector reached "all-time-high territory (in April), and we see this as a sign of technical strength."

S&P said energy and industrial shares also are "overweight," while utilities were upgraded to "market weight" from "underweight." The research firm downgraded materials to "market weight" and moved financials to "underweight," where they join consumer-discretionary stocks.

Nevertheless, S&P equity strategist Alec Young told TheStreet that his firm continues to see the S&P 500 Index rising to 1,400 over the coming year. The benchmark index closed at 1,271 on Friday after peaking at 1,362 at the end of April.

Reviewing what successful mutual fund managers are doing may provide investors clues for stocks picks. A so-called defensive portfolio has traditionally included consumer staples, health-care and utilities stocks.

Here are 10 funds that are defensive in their makeup and also have good five-year records, which means they have weathered other market slides without incurring serious damage:

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Rydex Consumer Products Fund ( RYCIX) lives up to its name as it has a 100% allocation to the consumer-products sector. It has had a great long-term record, with a five-year average annual return of 7.9%. It is down 2.5% over the past month, but up 9.6% over the past three months, and up 9.8% this year.

The fund holds 63 stocks and its portfolio is a veritable laundry list of the leading consumer-products companies.

Its top holdings are: household-goods maker Procter & Gamble ( PG), at 6%; Coca-Cola ( KO), 5.6%; cigarette maker Philip Morris ( PM), 5%; beverage and snack maker Pepsi ( PEP), 4.6%; processed-food giant Kraft Foods ( KFT), 3.4%; cigarette maker Altria ( MO), 3.4%; and personal-care products maker Colgate-Palmolive ( CL), 2.9%.


The aptly named Vice Fund ( VICEX) is proof of that. Although it is down 2.6% this month, it is up 10.4% this year which puts it in the top 1% of top-performing funds of the 1,970 funds in the large-blend stock fund category for that period. It also has a five-year average annualized return of 3.3%.

The fund's 30-stock portfolio is 57% consumer-defensive stocks, compared to 12% for its category average. The next-largest allocation is to industrials, at 25% of the fund, about double its category average, and consumer cyclical, a 14% weighting, versus the 8% average of other funds in its category.

The Vice Fund's top-five picks are: cigarette makers Philip Morris International ( PM) at 12.7% of the fund; Lorillard ( LO), 10%; Altria ( MO), 6%; and adult-beverage makers Carlsberg ( AS), at 6.3%, and Diageo ( DEO), 4.1%.

The industrial weighting includes a handful of defense-industry stocks, including: Northrop Grumman ( NOC), General Dynamics ( GD) and Raytheon ( RTN).

For those with no moral qualms about what they invest in, booze and butts do well in any investing environment.

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The $22 billion Vanguard Wellesley Income Fund ( VWINX) boasts a five-year annualized return of 7%.

The conservative-allocation-category fund's portfolio includes 55 stocks and 630 bonds, and it has an annual portfolio turnover of 30%.

In addition to a 3.5% yield, the fund is down 0.9% this month, but has a three-month return of 3%, and it is up 4.6% this year.

The Vanguard Wellesley Income Fund's top stock picks include: oil-industry giant Chevron ( CVX), at 1.9% of the fund, followed by drug maker Pfizer ( PFE), 1.4%; home-improvement retailer Home Depot ( HD), 1.4%; health-care-products company Johnson & Johnson ( JNJ), 1.3% and insurer Marsh & McLennan ( MMC), 1.3%.


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The $3.6 billion Dreyfus Appreciation Fund ( DGAGX) has a 29% consumer-defensive-stock weighting, more than double that of its peers in the large-blend fund category and a 24% energy weighting versus 11% for its category's average. The lowest sector weighting, at 7.7% of the fund, is consumer-cyclical stocks.

The fund has a return of 3.4% over the past three months and 4.6% this year but is down 2.5% over the past month, through June 17. The Dreyfus Appreciation Fund has a solid 4% average annual return over five years.

The fund's largest holdings are: oil-industry giant ExxonMobil ( XOM), at 6.6%; cigarette maker Philip Morris ( PM), 5.7%; Coca-Cola ( KO), 4.7%; and another oil-industry behemoth, Chevron ( CVX), at 4.5%.

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The BBH Core Select Fund ( BBTEX) has 24% of its $597 million assets in the consumer-staples sector, its largest weighting, twice that of its large-blend peers. But financials is the biggest sector, at 25% of the fund versus an 18% weighting for the average fund in its category. Health care is the next largest sector weighting, at 15%.

The fund has lost 3% in the past month, but is up 3.7% over the past three months and 4.8% this year. It has a 7.6% average annual return over five years.

BBH Core Select has a very low 19% portfolio turnover and holds only 29 stocks. Holdings are made up of companies with strong balance sheets, high free cash flow, and high returns on invested capital.

Its top positions are: Warren Buffett-led Berkshire Hathaway ( BRK.A), 5.6%; confectioner Nestle ( NSRGY), 5.6%; trash hauler Waste Management ( WM), 5%; drugmaker Novartis ( NVS), 4.7%; and Baxter International ( BAX), a developer of injectable medical therapies, at 4.5% of the fund.


The Sequoia Fund ( SEQUX), a large-cap blend fund, has been an able performer for a long time, sporting an amazing 9.7% average annual return over the past 15 years.

Its heaviest weighting now is in the health-care sector, at 27% of the fund, versus the 11% of its large-blend fund category peers, followed by a 23% consumer-cyclical weighting, compared to the average 8.4% weighting of its peers.

The fund has lost 3% over the past month, but is up 3% over the past three months and 7.9% this year.

The $4.3 billion fund holds only 31 stocks and has relatively low 23% annual turnover.

The top holdings are: drug maker Valeant Pharmaceuticals ( VRX), 13.7%; Warren Buffett's conglomerate Berkshire Hathaway ( BRK.A), 9.3%; discount-clothing retailer TJX Cos. ( TJX), 6%; construction-products maker Fastenal ( FAST), 5.5%; and Idexx Laboratories ( IDXX), a veterinary diagnostic laboratory business, at 4.8%.

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The Yacktman Fund ( YACKX) is a good long-distance runner with a performance that puts it in the top 1% over funds in the large-cap value fund category over three, five, 10 and 15 year periods. It's down 3.7% over the past month, but up 2.3% over three months and 5% this year.

The portfolio is anchored by a 34.6% consumer-defensive weighting, almost three times the size of the average of its peers. Consumer cyclicals, at 22%, is the second-biggest weighting, versus the 6.5% of its peers, while health care is 18% of the fund versus the 11.7% average for its category.

The $5.2 billion fund holds 38 stocks and has a slim 10% annual portfolio turnover.

The fund's largest holdings include: media conglomerate News Corp. ( NWSA), at 11%; beverage and snack maker Pepsi ( PEP), 10.5%; household-products maker Procter & Gamble ( PG), 5%; software maker Microsoft ( MSFT), 5%; Coca-Cola ( KO), 4.7%; and health-care conglomerate Johnson & Johnson ( JNJ), 4%.


The Vanguard Consumer Staples ETF ( VDC) is one quick way to get a play on the defensive consumer-staples sector. The exchange traded fund is down 2.6% over the past month, but up 9% over three months and 7.9% this year.

With $715 million in assets, it holds 108 stocks and has a miniscule 7% annual portfolio turnover.

The top holdings are: household-products maker Procter & Gamble ( PG), at 12.4%; Coca-Cola ( KO), 9.8%; cigarette maker Philip Morris ( PM), 8.3%; retail chain Wal-Mart ( WMT), 7.2%; beverage and snack maker Pepsi ( PEP), 7%; packaged-foods company Kraft Foods ( KFT), 4.2%; and cigarette maker Altria, 4.1%.

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Fidelity Select Health Care ( FSPHX) is positioned 88% in health care, and the holdings have performed solidly over the past three months as it is up 5.6% in the period and has gained 11% this year. What's more, it has a five-year annualized return of 7.6%.

The $2.3 billion fund holds 96 stocks and has an annual turnover of 99%.

Its top holdings and their portfolio weighting are: medical-device maker Covidien ( COV), 5.9%; life-sciences-products maker Illumina ( ILMN), 5.8%; pharmacy-benefits manager Medco Health Solutions ( MHS), 4.5%; drug-therapies developer Gilead Sciences ( GILD), 4.2%; drug distributor McKesson ( MCK), 3.7%; and drug maker Valeant Pharmaceuticals ( VRX), 3.3%.


Fidelity Select Consumer Staples ( FDFAX) has an admirable long-term record, ranking in the top 1% of consumer-staples-focused funds over the five-, 10- and 15-year periods. It has an average annual return of 10% over five years and 8.8% over 10 years. During the past month, it lost 2.5%, but it is up 9.6% over three months, and 5.7% this year.

The $1.6 billion fund holds 62 stocks and has an annual turnover of 57%.

Its top holdings include: household-products maker Procter & Gamble ( PG), at 16% of the fund; Coca-Cola ( KO), 12.4%; international cigarette maker British American Tobacco ( BTI), 7%; pharmacy retailer CVS Caremark ( CVS), 7%; cigarette maker Altria ( MO), 5.5%; and personal-products maker Colgate-Palmolive ( CL), 4%.

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