Intel, Yamana Gold Set to Shine

NEW YORK ( TheStreet) -- The upside for the liquidity-driven market created by the Federal Reserve's easing policies may be limited, but there are still opportunities for savvy stockpickers in names like Intel ( INTC) and Yamana Gold ( AUY), says Mark Spellman, portfolio manager for the Value Line Income & Growth Fund ( VALIX).

The $303 million fund, which garners 4 stars from fund-rater Morningstar, has returned 12.4% in the past year.

Welcome to TheStreet's Fund Manager Five Spot, where top fund managers give their best stock picks and views on the market in a five-question format.

Are you a bull or a bear right now?

Spellman: I think we are finally moving away from the purely liquidity-driven market we saw in the months leading up to the QE3 announcement in September. Stocks consistently rallied leading up to that because the market was perceived as "can't lose" -- the economy and corporate earnings perform well, then stocks go up. The economy and corporate earnings perform poorly, then the Fed will bail us out with massive liquidity, and stocks go up. Bottom line -- be long stocks no matter what. As we have seen this earnings period, we are back to a more fundamentally-driven market. Earnings reports have been scrutinized and bad news is bad news for the share prices again.

With the run-up in stock prices pre-QE3, valuation levels were getting extended so any disappointment in earnings was exacerbated on the downside. You saw this especially in tech, industrials and cyclicals. Generally speaking, I think we have another 5% or so risk to the downside this earnings period before I get more constructive. I see the economy sputtering here in what I see as a mid-cycle slowdown. I don't see a "sky is falling" scenario though at this point.

Based on that outlook, what is your top stock pick?

Spellman: Although it's a contrarian name, and somewhat controversial, I would have to say Intel is my top stock selection right now. We could talk about the bear case for days and a number of tech analysts would probably call it a value trap after its last earnings report. However, let's take a look at the positives. You have a stock selling at around 10x next year's estimated EPS, which have been lowered by the way, and its dividend has been and should continue to be steadily raised. It now yields a utility-like 4.1% with a less than 40% payout ratio on next year's earnings.

The short term will be choppy for sure with this stock, but I see about 10% risk with upside of at least 30% before the dividend looking out through the end of 2013. I think it's a great stock to hold in our Income and Growth Fund at this level.

What is your top "sleeper" or "under the radar" stock?

Spellman: I would single out Yamana Gold. I just think you have a number of different ways to make money in the stock. It's done well this year and is up 30% since the end of July but I still like it under $20. For a portfolio of stocks you add a good inflation hedge post-QE3 and if we get QE-infinity as well.

From a company specific standpoint, you have a company that is wrapping up a major spending cycle for their South American gold mines and looks poised to double its production over the next two years or so. Free cash flow is going to start increasing dramatically over that time period and could mean steadily higher dividend payments. I think you have the potential for a 50% total return over the next two years.

What areas of the market are you presently avoiding?

Spellman: In what may sound strange for a fund that looks to generate income, we do not find the utility sector very attractive right now. There are a few names we like but there are more in number that we do not.

Dividend yields are at historic lows, many have negative free cash flow due to large spending cycles and with the rebuilding post-Sandy, many will have an even larger spend in the near term and finally earnings growth is low to mid-single digits and ROE are in the low teens at best. And for all that you have to pay 17x earnings? It just doesn't seem like a profile to make a lot of money in the stocks anytime soon.

Finally, what is your outlook for 2013?

Spellman: I am constructive for next year. As I mentioned earlier, I think we have another 5% or so risk to the downside this earnings period before I get more bullish. I see the economy sputtering here in what I see as a mid-cycle slowdown. I don't see a "sky is falling" scenario though at this point.

All that said, I am constructive on many financials as I see that over time they have repaired their balance sheets and may actually show real growth next year. I think there are a number of trends in tech that will continue to drive spending dollars including security, data management, and payment systems. And I think the Chinese economy should start to accelerate as the year progresses as well. All in all, I see the stock market transitioning to a more fundamentally driven and valuation sensitive one which will benefit stockpickers like us.

-- Written by Gregg Greenberg in New York.

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

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