Sept. 28--A more than 30-year run in bonds is probably over. The recent Federal Reserve decision to keep interest rates artificially low suggests it is seeing weaker-than-expected economic growth.
So where do investors go?
Rather than follow the herd, Pewaukee money manager Michael Underhill suggests scouting out less traveled parts of the market.
"You've got to think differently," said Underhill, founder and chief executive officer of Capital Innovations LLC. "Everyone else is either buying exchange-traded or index funds or trading last year's utility funds."
Underhill says the stock market has paused but will resume its move from the "hope" phase to "growth" phase. That growth phase tends to be longer but with more moderate returns and low volatility, he said.
Investors should seek out companies that have good governance models and are positioned to do well as the economy continues to recover, he said.
Markwest Energy Partners LP (MWE, $71.57), Denver, is a master limited partnership that is in the business of gathering and processing natural gas. It has a presence in the Marcellus Shale, Utica Shale, and other areas of the country where natural gas is extracted with fracking methods that include horizontal drilling and other relatively new technologies.
"Natural gas is a game-changer," Underhill said.
This large-cap partnership has a dominant footprint in North America, a defensible market share and is well-positioned to benefit from the shale gas boom, he said. Markwest's strong management team is focused on operational improvement rather than financial engineering, and the company produces strong free cash flow, he added.
The biggest risk to owning Markwest shares is the far-fetched possibility that the world might stop using energy, Underhill said.
Markwest shares have traded in a 52-week range of $46.03 to $71.60. They could reach as high as $90 in the next six months, Underhill said.
Kapstone Paper and Packaging Corp. (KS, $42.23), Northbrook, Ill., produces, sells and exports unbleached kraft paper and corrugated products for use as wrapping materials, and bags for pet food, cement, groceries and other items.
Kapstone isn't the most exciting-sounding company.
"How many portfolio managers and analysts are running around talking about a sexy box company they own? Everybody wants Apple or Google or Facebook," Underhill said.
Recent acquisitions will enhance this company's performance, he said. For example, he expects Kapstone's July acquisition of Longview Fibre, which adds a low-cost western U.S. containerboard capacity, to add to earnings.
Kapstone has the lowest enterprise value to cash flow in its industry, Underhill said. The company's earnings are expected to rise as the economy and consumption continue to recover and containerboard prices keep rising, Underhill said.
Kapstone shares have traded in a 52-week range of $19.24 to $50.10. They could trade as high as $55 in the next nine months, Underhill said.
Calavo Growers Inc. (CVGW, $30.73), Santa Paula, Calif., markets and distributes avocados, tomatoes, mangoes and other perishable foods to distributors, stores, restaurants and others.
While an avocado company might not make for exciting talk at a cocktail party, Calavo is an interesting play on demographics, Underhill said. Growth in the Hispanic population because of fertility rates and immigration, and preferences for healthier foods are changing eating habits and consumption patterns in the United States, Underhill said.
"We're seeing a large influx of consumers both eating avocados and using them for mass preparation of foods," he said.
The biggest risk with owning Calavo shares is the possibility that consumption does not continue to become healthier and people "give up the guacamole," Underhill said.
Calavo shares have traded in a 52-week range of $21.76 to $32.56. They could trade as high as $52 in the next 12 months, he said.
The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.