Where to invest in 2011: US large caps

By SmartMoney

For a small but growing number of savvy investors, uncertain times almost always offer opportunities.

And 2011 will be no different, they say.

This group argues that the pessimism that has engulfed the nation has kept ordinary investors from seeing some fantastic stock bargains, most notably in large U.S. companies.

"The Standard & Poor's 500 ($INX) is cooking right now in terms of earnings," says John Buckingham, the manager of the $110 million Al Frank Fund (VALUX), who has been buying shares of large companies such as Comcast (CMCSA, news, msgs) and Coca-Cola (KO, news, msgs).

• Find a broker and trade online

Certainly history is on the side of pros who make the boldest moves in dark times. Things seemed dire for both the economy and the markets in spring 2009.

But the market looked cheap, and the people who abandoned stocks missed out on a six-month rally of 50% or more.

Of course, Wall Street is still a hard sell for many investors, if only because their portfolios are nowhere near 2007 levels. "No return for 10 years, and two big declines -- I think that has people less interested in these stocks," says George Sertl Jr., a manager of the $276 million Artisan Value Fund (ARTLX).

But large-company stocks, from General Electric (GE, news, msgs) to McDonald's (MCD, news, msgs), are trading, on average, at a price-to-earnings ratios of 14.8, the lowest they've seen since the financial crisis (and before that, since 1990), according to Birinyi Associates.

Consumer-discretionary and industrials are among the sectors offering investors opportunities in 2011.

Betting on a consumer comeback

Based on economic data released in the fall, the American consumer just might be on the comeback trail. Fund managers are targeting businesses that cater to U.S. shoppers or an emerging consumer class abroad.

With the real-estate market still in the dumps, Americans may be stuck with their existing abodes for some time. The longer people stay put, the more likely they will spend money fixing up their homes, a trend that bodes well for home-improvement retailers like Lowe's (LOW, news, msgs).

During the recession, Lowe's tried to limit the damage. It cut back on store openings, opting to invest in existing locations, re-launch its website and find ways to schedule workers more efficiently. The measures seemed to have worked. While its profits faltered, the Mooresville, N.C., company boosted market share in every quarter during the downturn. Many analysts say the company can continue to increase market share and its cash flow as the economy improves.

Chief Executive Robert Niblock recently cautioned that the recovery could be slow, noting that consumers remain unwilling to take on big, discretionary home improvements. But fund managers like Sam Peters, co-manager of the $4 billion Legg Mason Capital Management Value Trust (LMVTX), says Lowe's, trading at 15 times expected 2011 earnings, remains a good way to play the housing recovery -- even if it doesn't happen tomorrow. "You've got a 2% dividend yield, and that starts to be enough for us," Peters says.

If earnings are growing, Niblock recently told investors, Lowe's will continue to increase its dividend and possibly buy back its own stock.

TJX

As thrifty fashionistas roam the aisles of T.J. Maxx and Marshalls, fund managers are doing their own bargain shopping on shares of TJX (TJX, news, msgs), the parent company of the two discount retailers.

T.J. Maxx and Marshalls outlets have been the beneficiaries of an emerging retail trend: People want style; they just aren't as willing to pay full price for it. "TJX is a great place for (cost-conscious shopping)" says Chuck Akre, of the Akre Focus Retail (AKREX) fund, which owns the stock.

The Framingham, Mass., retailer, which has stores throughout the United States, Canada and Europe, has weathered prior downturns, reporting only one year of same-store sales declines in its 33-year history. During this downturn, it has increased profits and free cash flow considerably.

Analysts value that kind of consistency. Part of TJX's profit growth comes from improvements that ensure that the right stores get the right merchandise at the right time.

But it's not just about keeping costs down. Analysts see strong prospects as the company expands outside of the United States, particularly by adding Marshalls stores in Canada.

CEO Carol Meyrowitz recently told analysts TJX's long-term plans call for 4,300 stores, up from 2,800 now, not including potential new markets. The retailer's strong balance sheet, with $1.4 billion in cash, can help fund that expansion.

While the stock has more than doubled from the lows of late 2008, fund managers still find it attractive, because it trades at just nine times expected fiscal 2012 free-cash flow. And with free cash expected to increase by more than 10% a year over the next five years, Akre says, "it's remarkably cheap."

Continued: Yum Brands

More from MSN Money and SmartMoney

• Best Vanguard funds for your 401k
• Car tech on the cheap: Off-the-shelf gadgets
• 10 hot stocks for a cold winter
• Your home: The hidden cost of going green
• Are Chinese stocks a good bet now?
• Boomer fitness business shapes up

 1 | 2 | next >