Jump Into Home Depot, J&J

NEW YORK ( TheStreet) -- Large-cap dividend payers Home Depot ( HD) and Johnson & Johnson ( JNJ) are poised to move higher as the economy gradually recovers, says Gary Bradshaw, co-portfolio manager for the Hodges Equity Income Fund ( HDPEX).

The $17 million fund, which garners five stars from fund rater Morningstar, has returned 14% 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.

What is your view of the economy?

Bradshaw: At the Hodges Equity Income Fund we remain encouraged that the U.S. economy will continue to recover at a tepid pace, yet gradually improve. We like what we see in the housing recovery and although unemployment will remain high it will get better. We think the U.S. market will be the best market to invest in 2013. Investors continue to sell their equity mutual funds and buy bond funds. Unfortunately, we think this is the exact opposite of what they should be doing. It makes no sense to us that investors continue to buy bonds at these anemic yields.

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

Bradshaw: Home Depot is our top pick. We look for companies with improving cash flow, growing earnings and increasing their dividends. HD benefits not just from the recent superstorm Sandy but also other past storms as communities continue to rebuild.

All the foreclosed homes that are being fixed up and of course the housing recovery that is in the first inning will be a plus. We believe HD is taking market share not only from Lowe's ( LOW) but also the local hardware stores. We think earnings will accelerate to $3.00 (per share) for the fiscal year ending Jan 2013 and $3.40 (per share) for the fiscal year ending Jan 2014 and HD recently raised their dividend by 12.5%.

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

Bradshaw: It may be a massive company, but Johnson & Johnson is a sleeper stock when it comes to dividends It's now yielding an impressive 3.42%. This stock has not moved significantly for 12 years and all the product recalls last year have left a bad taste in investors' mouths.

Yet earnings and cash flow continue to grow and AAA-rated JNJ has raised their dividend 50 straight years. With new management there is a renewed focus on running their business. The acquisition of Synthes is adding to earnings and with earnings of $5.07 (per share) in 2012 and $5.45 (per share) in 2013 stock appears inexpensive to us.

What areas of the market are you presently avoiding?

Bradshaw: Utilities trade at big multiples and are too expensive now. You've probably been hearing that from a lot of fund managers, but we believe it to be true.

Finally, what is your outlook for 2013?

Bradshaw: At Hodges, we are bullish on US equities for 2013 and expect stocks to outperform bonds. All in all, it should be a good year for stocks.

-- Written by Gregg Greenberg in New York.

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

More from Mutual Funds

Video: How to Select Mutual Funds in Your 401(k)

Video: How to Select Mutual Funds in Your 401(k)

Tax Tip: Uncle Sam Will Be Looking for Your Cryptocurrency Trades

Tax Tip: Uncle Sam Will Be Looking for Your Cryptocurrency Trades

Video: Jim Cramer Reacts to Novartis' Acquisition of AveXis

Video: Jim Cramer Reacts to Novartis' Acquisition of AveXis

U.S. Economy Added 103,000 Jobs in March, Missing Projections

U.S. Economy Added 103,000 Jobs in March, Missing Projections

U.S. Economy Seen Adding Jobs at 'Goldilocks' Pace For Stock Investors

U.S. Economy Seen Adding Jobs at 'Goldilocks' Pace For Stock Investors